Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

** **
| **x** | **Quarterly Report pursuant to  Section 13 or 15 (d) of the Securities Exchange Act of 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

** **

**for the Quarterly Period Ended September 30, 2010.**

** **
| **o** | **Transition report pursuant to  Section 13 or 15 (d) of the Exchange Act** |
|-------|---------------------------------------------------------------------------------------|

** **

**for the Transition Period from             to             .**

** **

**No. 0-17077**

**(Commission File Number)**

** **

**PENNS WOODS BANCORP, INC.**

(Exact name of Registrant as specified in its charter)

 

| **PENNSYLVANIA**                | ** ** | **23-2226454**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

| **300 Market Street,  P.O. Box 967 Williamsport, Pennsylvania** | ** ** | **17703-0967** |
|----------------------------------------------------------------------|------------|----------------|
| (Address of principal executive offices)                             |       | (Zip Code)     |

 

**(570) 322-1111**

Registrant’s telephone number, including area code

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES x     NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  YES o     NOo

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definition of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer o |   | Accelerated filer x       |
|---------------------------|--------|---------------------------|
|                      |   |                      |
| Non-accelerated filer o   |   | Small reporting company o |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). YES o  NO x

 

OnNovember 5, 2010 there were 3,834,769 shares of the Registrant’s commonstock outstanding.

 

 

 

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Tableof Contents

 

**PENNS WOODS BANCORP, INC.**

**INDEX TO QUARTERLY REPORT ON FORM 10-Q**

 
| ** **                                                                                                                              | ** **                                                                                      | **Page**   |
|-----------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                              | ** **                                                                                      | **Number** |
|                                                                                                                                    |                                                                                            |       |
| **Part I**                                                                                                                         | **Financial  Information**                                                                      |       |
|                                                                                                                                    |                                                                                            |       |
| **Item 1.**                                                                                                                             | **Financial  Statements**                                                                       |       |
|                                                                                                                                    |                                                                                            |       |
| Consolidated  Balance Sheet (unaudited) as of September 30, 2010 and December 31,  2009                                       |                                                                                            | 3          |
|                                                                                                                                    |                                                                                            |       |
| Consolidated  Statement of Income (unaudited) for the Three and Nine Months ended September 30,  2010 and 2009                     |                                                                                            | 4          |
|                                                                                                                                    |                                                                                            |       |
| Consolidated  Statement of Changes in Shareholders’ Equity (unaudited) for the Nine Months  ended September 30, 2010 and 2009 |                                                                                            | 5          |
|                                                                                                                                    |                                                                                            |       |
| Consolidated  Statement of Comprehensive Income (unaudited) for the Three and Nine Months  ended September 30, 2010 and 2009       |                                                                                            | 5          |
|                                                                                                                                    |                                                                                            |       |
| Consolidated  Statement of Cash Flows (unaudited) for the Nine Months ended  September 30, 2010 and 2009                           |                                                                                            | 6          |
|                                                                                                                                    |                                                                                            |       |
| Notes  to Consolidated Financial Statements (unaudited)                                                                                 |                                                                                            | 7          |
|                                                                                                                                    |                                                                                            |
| **Item 2.**                                                                                                                             | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 23         |
| **Item 3.**                                                                                                                             | **Quantitative  and Qualitative Disclosures About Market Risk**                                 | 40         |
| **Item 4.**                                                                                                                             | **Controls and  Procedures**                                                                    | 40         |
|                                                                                                                                    |                                                                                            |       |
| **Part II**                                                                                                                        | **Other Information**                                                                           |       |
|                                                                                                                                    |                                                                                            |       |
| **Item 1.**                                                                                                                             | **Legal Proceedings**                                                                           | 41         |
| **Item 1A.**                                                                                                                            | **Risk Factors**                                                                                | 41         |
| **Item 2.**                                                                                                                             | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                | 41         |
| **Item 3.**                                                                                                                             | **Defaults  Upon Senior Securities**                                                            | 41         |
| **Item 4.**                                                                                                                             | **(Removed and  Reserved)**                                                                     | 41         |
| **Item 5.**                                                                                                                             | **Other Information**                                                                           | 41         |
| **Item 6.**                                                                                                                             | **Exhibits**                                                                                    | 42         |
| **Signatures**                                                                                                                          | 43                                                                                              |
| **Exhibit Index and Exhibits**                                                                                                     | 44                                                                                              |
|                                                                                                                                         |                                                                                                 |            |  |

 

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**Part I.  FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**PENNS WOODS BANCORP, INC.**

**CONSOLIDATEDBALANCE SHEET**

**(UNAUDITED)**

 

 
| ** **                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In Thousands, Except Share Data)**                                           | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **ASSETS:**                                                                                         |       |                   |       |                  |       |
| Noninterest-bearing balances                                                                        |       | $                      | 15,741     |                  | $          | 13,760 |   |
| Interest-bearing deposits in other financial  institutions                                          |       | 7,316                  |       | 28                    |       |
| Total cash and cash equivalents                                                                     |       | 23,057                 |       | 13,788                |       |
|                                                                                                |       |                   |       |                  |       |
| Investment securities, available for sale, at fair  value                                           |       | 232,058                |       | 208,768               |       |
| Investment securities, held to maturity (fair  value of $83 and $108)                               |       | 82                     |       | 107                   |       |
| Loans held for sale                                                                                 |       | 5,360                  |       | 4,063                 |       |
| Loans                                                                                               |       | 412,873                |       | 405,529               |       |
| Less: Allowance for loan losses                                                                     |       | 5,479                  |       | 4,657                 |       |
| Loans, net                                                                                          |       | 407,394                |       | 400,872               |       |
| Premises and equipment, net                                                                         |       | 7,814                  |       | 7,988                 |       |
| Accrued interest receivable                                                                         |       | 3,657                  |       | 3,523                 |       |
| Bank-owned life insurance                                                                           |       | 15,345                 |       | 14,942                |       |
| Investment in limited partnerships                                                                  |       | 4,415                  |       | 4,898                 |       |
| Goodwill                                                                                            |       | 3,032                  |       | 3,032                 |       |
| Deferred tax asset                                                                                  |       | 7,041                  |       | 9,491                 |       |
| Other assets                                                                                        |       | 4,241                  |       | 4,732                 |       |
| **TOTAL ASSETS**                                                                                    |       | $                      | 713,496    |                  | $          | 676,204 |   |
|                                                                                                |       |                   |       |                  |       |
| **LIABILITIES:**                                                                                    |       |                   |       |                  |       |
| Interest-bearing deposits                                                                           |       | $                      | 442,042    |                  | $          | 417,388 |   |
| Noninterest-bearing deposits                                                                        |       | 92,128                 |       | 79,899                |       |
| Total deposits                                                                                      |       | 534,170                |       | 497,287               |       |
|                                                                                                |       |                   |       |                  |       |
| Short-term borrowings                                                                               |       | 14,629                 |       | 18,354                |       |
| Long-term borrowings, Federal Home Loan Bank  (FHLB)                                                |       | 81,778                 |       | 86,778                |       |
| Accrued interest payable                                                                            |       | 832                    |       | 1,073                 |       |
| Other liabilities                                                                                   |       | 6,764                  |       | 5,796                 |       |
| TOTAL LIABILITIES                                                                                   |       | 638,173                |       | 609,288               |       |
|                                                                                                |       |                   |       |                  |       |
| SHAREHOLDERS’ EQUITY                                                                           |       |                   |       |                  |       |
| Common stock, par value $8.33, 10,000,000 shares  authorized; 4,014,871 and 4,013,142 shares issued |       | 33,457                 |       | 33,443                |       |
| Additional paid-in capital                                                                          |       | 18,045                 |       | 18,008                |       |
| Retained earnings                                                                                   |       | 29,994                 |       | 27,218                |       |
| Accumulated other comprehensive gain (loss):                                                        |       |                   |       |                  |       |
| Net unrealized gain (loss) on available for sale  securities                                        |       | 2,057                  |       | (3,569                | )          |
| Defined benefit plan                                                                                |       | (1,920                 | )          | (1,920                | )          |
| Less: Treasury stock at cost, 180,596 and 179,028  shares                                           |       | (6,310                 | )          | (6,264                | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                     |       | 75,323                 |       | 66,916                |       |
| **TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                |       | $                      | 713,496    |                  | $          | 676,204 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

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**PENNS WOODS BANCORP, INC.**

**CONSOLIDATEDSTATEMENT OF INCOME**

**(UNAUDITED)**

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In Thousands, Except Per Share Data)** | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                         | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **INTEREST AND DIVIDEND INCOME:**                                  |       |                             |       |                            |       |   |   |   |   |
| Loans including fees                                               |       | $                                | 6,434      |                            | $          | 6,457 |   | $ | 19,162 |   | $ | 19,025 |   |
| Investment securities:                                             |       |                             |       |                            |       |   |   |   |   |
| Taxable                                                            |       | 1,428                            |       | 1,368                           |       | 4,182 |   | 4,105 |   |
| Tax-exempt                                                         |       | 1,266                            |       | 1,253                           |       | 3,794 |   | 3,748 |   |
| Dividend and other interest income                                 |       | 54                               |       | 35                              |       | 157 |   | 165 |   |
| TOTAL INTEREST AND DIVIDEND INCOME                                 |       | 9,182                            |       | 9,113                           |       | 27,295 |   | 27,043 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **INTEREST EXPENSE:**                                              |       |                             |       |                            |       |   |   |   |   |
| Deposits                                                           |       | 1,458                            |       | 2,148                           |       | 4,719 |   | 6,357 |   |
| Short-term borrowings                                              |       | 77                               |       | 82                              |       | 197 |   | 318 |   |
| Long-term borrowings, FHLB                                         |       | 889                              |       | 938                             |       | 2,733 |   | 2,781 |   |
| TOTAL INTEREST EXPENSE                                             |       | 2,424                            |       | 3,168                           |       | 7,649 |   | 9,456 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **NET INTEREST INCOME**                                            |       | 6,758                            |       | 5,945                           |       | 19,646 |   | 17,587 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| PROVISION FOR LOAN LOSSES                                          |       | 700                              |       | 270                             |       | 1,400 |   | 582 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **NET INTEREST INCOME AFTER  PROVISION FOR LOAN LOSSES**           |       | 6,058                            |       | 5,675                           |       | 18,246 |   | 17,005 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **NON-INTEREST INCOME:**                                           |       |                             |       |                            |       |   |   |   |   |
| Service charges                                                    |       | 562                              |       | 553                             |       | 1,609 |   | 1,619 |   |
| Securities gains (losses), net                                     |       | 109                              |       | (507                            | )          | 162 |   | (4,962 | ) |
| Earnings on bank-owned life insurance                              |       | 143                              |       | 144                             |       | 442 |   | 418 |   |
| Gain on sale of loans                                              |       | 202                              |       | 305                             |       | 714 |   | 526 |   |
| Insurance commissions                                              |       | 230                              |       | 287                             |       | 767 |   | 988 |   |
| Other                                                              |       | 624                              |       | 599                             |       | 1,880 |   | 1,624 |   |
| TOTAL NON-INTEREST INCOME                                          |       | 1,870                            |       | 1,381                           |       | 5,574 |   | 213 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **NON-INTEREST EXPENSE:**                                          |       |                             |       |                            |       |   |   |   |   |
| Salaries and employee benefits                                     |       | 2,427                            |       | 2,588                           |       | 7,779 |   | 7,665 |   |
| Occupancy, net                                                     |       | 303                              |       | 299                             |       | 947 |   | 956 |   |
| Furniture and equipment                                            |       | 296                              |       | 293                             |       | 922 |   | 906 |   |
| Pennsylvania shares tax                                            |       | 170                              |       | 171                             |       | 508 |   | 514 |   |
| Amortization of investment in limited partnerships                 |       | 200                              |       | 142                             |       | 483 |   | 425 |   |
| Other                                                              |       | 1,308                            |       | 1,604                           |       | 4,041 |   | 4,161 |   |
| TOTAL NON-INTEREST EXPENSE                                         |       | 4,704                            |       | 5,097                           |       | 14,680 |   | 14,627 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **INCOME BEFORE INCOME TAX PROVISION  (BENEFIT)**                  |       | 3,224                            |       | 1,959                           |       | 9,140 |   | 2,591 |   |
| INCOME TAX PROVISION (BENEFIT)                                     |       | 376                              |       | 37                              |       | 1,072 |   | (1,002 | ) |
| **NET INCOME**                                                     |       | $                                | 2,848      |                            | $          | 1,922 |   | $ | 8,068 |   | $ | 3,593 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **NET INCOME PER SHARE - BASIC**                                   |       | $                                | 0.74       |                            | $          | 0.50 |   | $ | 2.10 |   | $ | 0.94 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **NET INCOME PER SHARE - DILUTED**                                 |       | $                                | 0.74       |                            | $          | 0.50 |   | $ | 2.10 |   | $ | 0.94 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **WEIGHTED AVERAGE SHARES  OUTSTANDING - BASIC**                   |       | 3,833,850                        |       | 3,833,131                       |       | 3,834,101 |   | 3,832,471 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **WEIGHTED AVERAGE SHARES  OUTSTANDING - DILUTED**                 |       | 3,833,990                        |       | 3,833,305                       |       | 3,834,241 |   | 3,832,555 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **DIVIDENDS PER SHARE**                                            |       | $                                | 0.46       |                            | $          | 0.46 |   | $ | 1.38 |   | $ | 1.38 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

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**PENNS WOODS BANCORP, INC.**

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

**(UNAUDITED)**

 
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED**        | ** ** | ** **             | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                         | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **             | ** ** | **TOTAL**              | ** ** |
| ** **                                                         | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**           | ** ** | **SHAREHOLDERS’** | ** ** |
| **(In Thousands, Except Per Share Data)** | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **INCOME (LOSS)** | ** ** | **STOCK**              | ** ** | **EQUITY** | ** ** |
| Balance,  December 31, 2008                                   |       | 4,010,528  |       | $              | 33,421     |         | $          | 17,959            |       | $                      | 28,177     |                   | $          | (12,266    | )          | $ | (6,264 | ) | $ | 61,027 |   |
|                                                               |       |       |       |           |       |         |       |              |       |                   |       |                   |       |       |       |
| Comprehensive  income:                                             |       |       |       |           |       |         |       |              |       |                   |       |                   |       |       |       |
| Net  income                                                        |       |       |       |           |       |         |       | 3,593             |       |                   |       |                   |       | 3,593      |       |
| Other  comprehensive income                                        |       |       |       |           |       |         |       |              |       | 11,156                 |       |                   |       | 11,156     |       |
| Dividends  declared, ($1.38 per share)                             |       |       |       |           |       |         |       | (5,289            | )          |                   |       |                   |       | (5,289     | )          |
| Common  shares issued for employee stock purchase plan             |       | 1,991      |       | 16             |       | 36           |       |              |       |                   |       |                   |       | 52         |       |
| Balance,  September 30, 2009                                  |       | 4,012,519  |       | $              | 33,437     |         | $          | 17,995            |       | $                      | 26,481     |                   | $          | (1,110     | )          | $ | (6,264 | ) | $ | 70,539 |   |

 
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | **ACCUMULATED**        | ** ** | ** **             | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                         | ** ** | **COMMON** | ** ** | **ADDITIONAL** | ** ** | ** **   | ** ** | **OTHER**         | ** ** | ** **             | ** ** | **TOTAL**              | ** ** |
| ** **                                                         | ** ** | **STOCK**  | ** ** | **PAID-IN**    | ** ** | **RETAINED** | ** ** | **COMPREHENSIVE** | ** ** | **TREASURY**           | ** ** | **SHAREHOLDERS’** | ** ** |
| **(In Thousands, Except Per Share Data)** | ** ** | **SHARES** | ** ** | **AMOUNT**     | ** ** | **CAPITAL**  | ** ** | **EARNINGS**      | ** ** | **INCOME (LOSS)** | ** ** | **STOCK**              | ** ** | **EQUITY** | ** ** |
| Balance,  December 31, 2009                                   |       | 4,013,142  |       | $              | 33,443     |         | $          | 18,008            |       | $                      | 27,218     |                   | $          | (5,489     | )          | $ | (6,264 | ) | $ | 66,916 |   |
|                                                               |       |       |       |           |       |         |       |              |       |                   |       |                   |       |       |       |
| Comprehensive  income:                                             |       |       |       |           |       |         |       |              |       |                   |       |                   |       |       |       |
| Net  income                                                        |       |       |       |           |       |         |       | 8,068             |       |                   |       |                   |       | 8,068      |       |
| Other  comprehensive income                                        |       |       |       |           |       |         |       |              |       | 5,626                  |       |                   |       | 5,626      |       |
| Dividends  declared, ($1.38 per share)                             |       |       |       |           |       |         |       | (5,292            | )          |                   |       |                   |       | (5,292     | )          |
| Common  shares issued for employee stock purchase plan             |       | 1,729      |       | 14             |       | 37           |       |              |       |                   |       |                   |       | 51         |       |
| Purchase  of treasury stock (1,568 shares)                         |       |       |       |           |       |         |       |              |       |                   |       | (46                    | )          | (46        | )          |
| Balance,  September 30, 2010                                  |       | 4,014,871  |       | $              | 33,457     |         | $          | 18,045            |       | $                      | 29,994     |                   | $          | 137        |       | $ | (6,310 | ) | $ | 75,323 |   |

 

**PENNS WOODS BANCORP, INC.**

**CONSOLIDATEDSTATEMENT OF COMPREHENSIVE INCOME**

**(UNAUDITED)**

 
| ** **                                                                       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(In Thousands)**                                                          | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                             |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  Income                                                                      |       |                                                     |       | $                                                       | 2,848      |   |   |   | $ | 1,922 |   |   |   | $ | 8,068 |   |   |   | $ | 3,593 |   |
| Other  Comprehensive income:                                                     |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Change  in unrealized gain on available for sale securities                      |       | 5,591                                                    |       |                                                    |       | 13,119 |   |   |   | 8,686 |   |   |   | 11,941 |   |   |   |
| Less:  Reclassification adjustment for net gains (losses) included in net income |       | 109                                                      |       |                                                    |       | (507 | ) |   |   | 162 |   |   |   | (4,962 | ) |   |   |
| Other  comprehensive income before tax expense                                   |       |                                                     |       | 5,482                                                   |       |   |   | 13,626 |   |   |   | 8,524 |   |   |   | 16,903 |   |
| Income  tax expense related to other comprehensive income                        |       |                                                     |       | 1,864                                                   |       |   |   | 4,633 |   |   |   | 2,898 |   |   |   | 5,747 |   |
| Other  comprehensive income, net of tax                                          |       |                                                     |       | 3,618                                                   |       |   |   | 8,993 |   |   |   | 5,626 |   |   |   | 11,156 |   |
| Comprehensive  income                                                            |       |                                                     |       | $                                                       | 6,466      |   |   |   | $ | 10,915 |   |   |   | $ | 13,694 |   |   |   | $ | 14,749 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

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**PENNS WOODS BANCORP, INC.**

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**          | ** ** |
| **(In Thousands)**                                                            | ** ** | **2010**                        | ** ** | **2009** | ** ** |
|                                                                               |       |                            |       |   |   |
| **OPERATING ACTIVITIES:**                                                          |       |                            |       |   |   |
| Net Income                                                                         |       | $                               | 8,068      |   | $ | 3,593 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                      |       | 558                             |       | 541 |   |
| Provision for loan losses                                                          |       | 1,400                           |       | 582 |   |
| Accretion and amortization of investment security  discounts and premiums          |       | (1,557                          | )          | (1,052 | ) |
| Securities (gains) losses, net                                                     |       | (162                            | )          | 4,962 |   |
| Originations of loans held for sale                                                |       | (31,557                         | )          | (24,448 | ) |
| Proceeds of loans held for sale                                                    |       | 30,974                          |       | 23,193 |   |
| Gain on sale of loans                                                              |       | (714                            | )          | (526 | ) |
| Earnings on bank-owned life insurance                                              |       | (442                            | )          | (418 | ) |
| Other, net                                                                         |       | 1,156                           |       | (1,169 | ) |
| Net cash provided by operating activities                                          |       | 7,724                           |       | 5,258 |   |
| **INVESTING ACTIVITIES**                                                           |       |                            |       |   |   |
| Investment securities available for sale:                                          |       |                            |       |   |   |
| Proceeds from sales                                                                |       | 3,446                           |       | 5,377 |   |
| Proceeds from calls and maturities                                                 |       | 12,424                          |       | 7,596 |   |
| Purchases                                                                          |       | (28,918                         | )          | (10,963 | ) |
| Investment securities held to maturity:                                            |       |                            |       |   |   |
| Proceeds from calls and maturities                                                 |       | 26                              |       | 25 |   |
| Net increase in loans                                                              |       | (8,148                          | )          | (20,728 | ) |
| Acquisition of bank premises and equipment                                         |       | (384                            | )          | (467 | ) |
| Proceeds from the sale of foreclosed assets                                        |       | 193                             |       | — |   |
| Purchase of bank-owned life insurance                                              |       | (47                             | )          | (59 | ) |
| Proceeds from bank-owned life insurance death  benefit                             |       | 82                              |       | — |   |
| Investment in limited partnership                                                  |       | —                          |       | (738 | ) |
| Purchases of regulatory stock                                                      |       | —                          |       | (170 | ) |
| Net cash used for investing activities                                             |       | (21,326                         | )          | (20,127 | ) |
| **FINANCING ACTIVITIES**                                                           |       |                            |       |   |   |
| Net increase in interest-bearing deposits                                          |       | 24,654                          |       | 69,160 |   |
| Net increase (decrease) in noninterest-bearing  deposits                           |       | 12,229                          |       | (466 | ) |
| Repayment of long-term borrowings, FHLB                                            |       | (5,000                          | )          | — |   |
| Net decrease in short-term borrowings                                              |       | (3,725                          | )          | (52,506 | ) |
| Dividends paid                                                                     |       | (5,292                          | )          | (5,289 | ) |
| Issuance of common stock                                                           |       | 51                              |       | 52 |   |
| Purchase of treasury stock                                                         |       | (46                             | )          | — |   |
| Net cash provided by financing activities                                          |       | 22,871                          |       | 10,951 |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                              |       | 9,269                           |       | (3,918 | ) |
| CASH AND CASH EQUIVALENTS, BEGINNING                                               |       | 13,788                          |       | 16,581 |   |
| CASH AND CASH EQUIVALENTS, ENDING                                                  |       | $                               | 23,057     |   | $ | 12,663 |   |
|                                                                               |       |                            |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH  FLOW INFORMATION**                             |       |                            |       |   |   |
|                                                                               |       |                            |       |   |   |
| Interest paid                                                                      |       | $                               | 7,890      |   | $ | 9,582 |   |
| Income taxes paid                                                                  |       | 1,950                           |       | 1,175 |   |
| Transfer of loans to foreclosed real estate                                        |       | 226                             |       | 921 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

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**PENNS WOODS BANCORP, INC.AND SUBSIDIARIES**

**NOTES TO**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1.  Basis of Presentation**

 

Theconsolidated financial statements include the accounts of Penns Woods Bancorp, Inc.(the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc.,Woods Real Estate Development Company, Inc., and Jersey Shore State Bank(the “Bank”) and its wholly-owned subsidiary, The M Group, Inc. D/B/A TheComprehensive Financial Group (“The M Group”). All significant inter-company balances and transactions have beeneliminated in the consolidation.

 

Theinterim financial statements are unaudited but, in the opinion of management,reflect all adjustments necessary for the fair presentation of results for suchperiods.  The results of operations forany interim period are not necessarily indicative of results for the fullyear.  These financial statements shouldbe read in conjunction with the financial statements and notes theretocontained in the Company’s Annual Report on Form 10-K for the year ended December 31,2009.

 

Theaccounting policies followed in the presentation of interim financial resultsare the same as those followed on an annual basis.  These policies arepresented on pages 38 through 44 of the Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

Inreference to the attached financial statements, all adjustments are of a normalrecurring nature pursuant to Rule 10-01(b) (8) of RegulationS-X.

 

**Note 2. Recent Accounting Pronouncements**

 

InDecember 2009, the FASB issued ASU 2009-16, *Accountingfor Transfer of Financial Assets*. ASU 2009-16 provides guidance to improve the relevance, representationalfaithfulness, and comparability of the information that an entity provides inits financial statements about a transfer of financial assets; the effects of atransfer on its financial position, financial performance, and cash flows; anda transferor’s continuing involvement, if any, in transferred financialassets.  ASU 2009-16 is effective forannual periods beginning after November 15, 2009 and for interim periodswithin those fiscal years.  The adoptionof this guidance did not have a material impact on the Company’s financialstatements.

 

InJanuary 2010, the FASB issued ASU 2010-01, *Equity(Topic 505): Accounting for Distributions to Shareholders with Components ofStock and Cash — a consensus of the FASB Emerging Issues Task Force*.ASU 2010-01 clarifies that the stock portion of a distribution to shareholdersthat allows them to elect to receive cash or stock with a potential limitationon the total amount of cash that all shareholders can elect to receive in theaggregate is considered a share issuance that is reflected in EPS prospectivelyand is not a stock dividend.  ASU 2010-01is effective for interim and annual periods ending on or after December 15,2009 and should be 

 

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appliedon a retrospective basis.  The adoptionof this guidance did not have a material impact on the Company’s financialstatements.

 

InJanuary 2010, the FASB issued ASU 2010-05, *Compensation— Stock Compensation (Topic 718): Escrowed Share Arrangements and thePresumption of Compensation*. ASU 2010-05 updates existing guidanceto address the SEC staff’s views on overcoming the presumption that for certainshareholders escrowed share arrangements represent compensation.  ASU 2010-05 is effective January 15,2010.  The adoption of this guidance didnot have a material impact on the Company’s financial statements.

 

InJanuary 2010, the FASB issued ASU No. 2010-06, *Fair ValueMeasurements and Disclosures (Topic 820): Improving Disclosures about FairValue Measurements*. ASU 2010-06 amends Subtopic 820-10 to clarifyexisting disclosures, require new disclosures, and includes conformingamendments to guidance on employers’ disclosures about postretirement benefitplan assets. ASU 2010-06 is effective for interim and annual periods beginningafter December 15, 2009, except for disclosures about purchases, sales,issuances, and settlements in the roll forward of activity in Level 3 fairvalue measurements. Those disclosures are effective for fiscal years beginningafter December 15, 2010 and for interim periods within those fiscalyears.  The Company has presented thenecessary disclosures in Note 7 (NetPeriodic Benefit Cost-Defined Benefit Plans) herein.

 

InFebruary 2010, the FASB issued ASU 2010-08, *TechnicalCorrections to Various Topics*. ASU 2010-08 clarifies guidance onembedded derivatives and hedging. ASU 2010-08 is effective for interim andannual periods beginning after December 15, 2009. The adoption of thisguidance did not have a material impact on the Company’s financial position orresults.

 

InMarch 2010, the FASB issued ASU 2010-11, *Derivativesand Hedging*.  ASU 2010-11provides clarification and related additional examples to improve financialreporting by resolving potential ambiguity about the breadth of the embeddedcredit derivative scope exception in ASC 815-15-15-8.  ASU 2010-11 is effective at the beginning ofthe first fiscal quarter beginning after June 15, 2010. The adoption ofthis guidance did not have a material impact on the Company’s financialstatements.

 

InApril 2010, the FASB issued ASU 2010-18, *Receivables(Topic 310):  Effect of a LoanModification When the Loan is a Part of a Pool That is Accounted for as aSingle Asset — a consensus of the FASB Emerging Issues Task Force*.  ASU 2010-18 clarifies the treatment for amodified loan that was acquired as part of a pool of assets.  Refinancing or restructuring the loan doesnot make it eligible for removal from the pool, the FASB said.  The amendment will be effective for loansthat are part of an asset pool and are modified during financial reportingperiods that end July 15, 2010 or later. The amendment did not have a material impact on the Company’s financialstatements.

 

InJuly 2010, FASB issued ASU No. 2010-20, *Receivables (Topic 310): Disclosures about the Credit Quality ofFinancing Receivables and the Allowance for Credit Losses. *ASU2010-20 is intended to provide additional information to assist financialstatement users in assessing an entity’s credit risk exposures and evaluatingthe adequacy of its allowance for credit losses. The 

 

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disclosuresas of the end of a reporting period are effective for interim and annualreporting periods ending on or after December 15, 2010. The disclosuresabout activity that occurs during a reporting period are effective for interimand annual reporting periods beginning on or after December 15,2010.  The amendments in ASU 2010-20 encourage, but do not require,comparative disclosures for earlier reporting periods that ended before initialadoption. However, an entity should provide comparative disclosures for thosereporting periods ending after initial adoption.  The Company is currentlyevaluating the impact the adoption of this guidance will have on the Company’sfinancial position or results of operations.

 

InAugust, 2010, the FASB issued ASU 2010-21, *Accounting for TechnicalAmendments to Various SEC Rules and Schedules*.  This ASU amends various SEC paragraphspursuant to the issuance of Release No. 33-9026:  Technical Amendments to Rules, Forms,Schedules, and Codification of Financial Reporting Policies and is not expectedto have a significant impact on the Company’s financial statements.

 

In August, 2010, the FASB issued ASU 2010-22, *TechnicalCorrections to SEC Paragraphs — An announcement made by the staff of the U.S.Securities and Exchange Commission*. This ASU amends various SEC paragraphs based on external commentsreceived and the issuance of SAB 112, which amends or rescinds portions ofcertain SAB topics and is not expected to have a significant impact on theCompany’s financial statements.

 

**Note 3. Per Share Data**

 

There are no convertible securities which would affectthe denominator in calculating basic and dilutive earnings per share.  Net income as presented on the consolidatedstatement of income will be used as the numerator.  The following table sets forth thecomposition of the weighted average common shares (denominator) used in thebasic and dilutive earnings per share computation.

 
| ** **                                                                                                | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average common shares issued                                                                     |       | 4,014,446                                                |       | 4,012,159                                               |       | 4,013,891 |   | 4,011,499 |   |
|                                                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Average treasury stock shares                                                                             |       | (180,596                                                 | )          | (179,028                                                | )          | (179,790 | ) | (179,028 | ) |
|                                                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average common shares and common stock  equivalents used to calculate basic earnings per share   |       | 3,833,850                                                |       | 3,833,131                                               |       | 3,834,101 |   | 3,832,471 |   |
|                                                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Additional common stock equivalents (stock options)  used to calculate diluted earnings per share         |       | 140                                                      |       | 174                                                     |       | 140 |   | 84 |   |
|                                                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average common shares and common stock  equivalents used to calculate diluted earnings per share |       | 3,833,990                                                |       | 3,833,305                                               |       | 3,834,241 |   | 3,832,555 |   |

 

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Options to purchase 990 shares of common stock at astrike price of $24.72 were outstanding during the three and nine months ended September 30,2010 and were included in the computation of diluted earnings per share.   The average market price of the Company’sstock was $31.49 and $31.47 for the three and nine months ended September 30,2010.  Options to purchase 990 shares ofcommon stock at a strike price of $31.82 and 990 shares of common stock at astrike price of $24.72 were outstanding during the three and nine months ended September 30,2009.  The options were included in thecomputation of diluted earnings per share during the periods that the strikeprice was less than the average market price of $32.62 and $28.41 for the threeand nine months ended September 30, 2009.

 

**Note 4. Investment Securities**

 

Theamortized cost and fair values of investment securities at September 30,2010 and December 31, 2009 are as follows:

 

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| ** **                            | ** ** | **September 30, 2010** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | ** **                       | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Amortized**                    | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In Thousands)**               | ** ** | **Cost**                         | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available for sale (AFS)              |       |                             |       |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                                | 27,494     |   | $ | 1,884 |   | $ | — |   | $ | 29,378 |   |
| State and political securities        |       | 169,900                          |       | 4,022 |   | (4,434 | ) | 169,488 |   |
| Other debt securities                 |       | 19,174                           |       | 654 |   | (12 | ) | 19,816 |   |
| Total debt securities                 |       | 216,568                          |       | 6,560 |   | (4,446 | ) | 218,682 |   |
| Equity securities                     |       | 12,373                           |       | 1,245 |   | (242 | ) | 13,376 |   |
| Total investment securities AFS       |       | $                                | 228,941    |   | $ | 7,805 |   | $ | (4,688 | ) | $ | 232,058 |   |
|                                  |       |                             |       |   |   |   |   |   |   |
| Held to maturity (HTM)                |       |                             |       |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                                | 5          |   | $ | — |   | $ | — |   | $ | 5 |   |
| Other debt securities                 |       | 77                               |       | 1 |   | — |   | 78 |   |
| Total investment securities HTM       |       | $                                | 82         |   | $ | 1 |   | $ | — |   | $ | 83 |   |

 
| ** **                            | ** ** | **December 31, 2009** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | ** **                      | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Amortized**                   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In Thousands)**               | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Available for sale (AFS)              |       |                            |       |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                               | 37,038     |   | $ | 2,098 |   | $ | — |   | $ | 39,136 |   |
| State and political securities        |       | 153,914                         |       | 733 |   | (9,770 | ) | 144,877 |   |
| Other debt securities                 |       | 12,271                          |       | 834 |   | (129 | ) | 12,976 |   |
| Total debt securities                 |       | 203,223                         |       | 3,665 |   | (9,899 | ) | 196,989 |   |
| Equity securities                     |       | 10,952                          |       | 981 |   | (154 | ) | 11,779 |   |
| Total investment securities AFS       |       | $                               | 214,175    |   | $ | 4,646 |   | $ | (10,053 | ) | $ | 208,768 |   |
|                                  |       |                            |       |   |   |   |   |   |   |
| Held to maturity (HTM)                |       |                            |       |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                               | 6          |   | $ | — |   | $ | — |   | $ | 6 |   |
| Other debt securities                 |       | 101                             |       | 1 |   | — |   | 102 |   |
| Total investment securities HTM       |       | $                               | 107        |   | $ | 1 |   | $ | — |   | $ | 108 |   |

 

The followingtables show the Company’s gross unrealized losses and fair value, aggregated byinvestment category and length of time, that the individual securities havebeen in a continuous unrealized loss position, at September 30, 2010 and December 31,2009.

 

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| ** **                            | ** ** | **September 30, 2010**           | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **Less than Twelve Months** | ** ** | **Twelve Months or Greater** | ** ** | **Total** | ** ** |
| ** **                            | ** ** | ** **                                 | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                            | ** ** | **Fair**                                   | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **(In Thousands)**               | ** ** | **Value**                                  | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
|                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                                          | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| State and political securities        |       | 6,202                                      |       | 35 |   | 37,594 |   | 4,399 |   | 43,796 |   | 4,434 |   |
| Other debt securities                 |       | 2,071                                      |       | 3 |   | 441 |   | 9 |   | 2,512 |   | 12 |   |
| Total debt securities                 |       | 8,273                                      |       | 38 |   | 38,035 |   | 4,408 |   | 46,308 |   | 4,446 |   |
| Equity securities                     |       | 1,320                                      |       | 213 |   | 251 |   | 29 |   | 1,571 |   | 242 |   |
| Total                                 |       | $                                          | 9,593      |   | $ | 251 |   | $ | 38,286 |   | $ | 4,437 |   | $ | 47,879 |   | $ | 4,688 |   |

 
| ** **                            | ** ** | **December 31, 2009**            | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **Less than Twelve Months** | ** ** | **Twelve Months or Greater** | ** ** | **Total** | ** ** |
| ** **                            | ** ** | ** **                                 | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                            | ** ** | **Fair**                                   | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **(In Thousands)**               | ** ** | **Value**                                  | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
|                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and agency securities |       | $                                          | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| State and political securities        |       | 60,005                                     |       | 2,336 |   | 36,267 |   | 7,434 |   | 96,272 |   | 9,770 |   |
| Other debt securities                 |       | —                                     |       | — |   | 1,191 |   | 129 |   | 1,191 |   | 129 |   |
| Total debt securities                 |       | 60,005                                     |       | 2,336 |   | 37,458 |   | 7,563 |   | 97,463 |   | 9,899 |   |
| Equity securities                     |       | 159                                        |       | 27 |   | 918 |   | 127 |   | 1,077 |   | 154 |   |
| Total                                 |       | $                                          | 60,164     |   | $ | 2,363 |   | $ | 38,376 |   | $ | 7,690 |   | $ | 98,540 |   | $ | 10,053 |   |

 

At September30, 2010 there were a total of 23 and 88 individual securities that were in acontinuous unrealized loss position for less than twelve months and greaterthan twelve months, respectively.

 

The Companyreviews its position quarterly and has determined that, at September 30, 2010,the declines outlined in the above table represent temporary declines and theCompany does not intend to sell and does not believe it will be required tosell these securities before recovery of their cost basis, which may be atmaturity.  There were 111 positions thatwere temporarily impaired at September 30, 2010.  The Company has concluded that the unrealizedlosses disclosed above are not other than temporary but are the result ofinterest rate changes, sector credit ratings changes, or company-specificratings changes that are not expected to result in the non-collection ofprincipal and interest during the period.

 

The amortizedcost and fair value of debt securities at September 30, 2010, by contractualmaturity, are shown below. Expected maturities may differ from contractualmaturities since borrowers may have the right to call or prepay obligationswith or without call or prepayment penalties.

 

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| ** **                        | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **Amortized**                    | ** ** | ** **                     | ** ** | **Amortized** | ** ** | ** ** | ** ** |
| **(In Thousands)**           | ** ** | **Cost**                         | ** ** | **Fair Value**            | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Due in one year or less           |       | $                                | 2,003      |                           | $          | 2,027 |   | $ | 25 |   | $ | 25 |   |
| Due after one year to five years  |       | 18,942                           |       | 19,574                         |       | 52 |   | 53 |   |
| Due after five years to ten years |       | 3,634                            |       | 3,493                          |       | — |   | — |   |
| Due after ten years               |       | 191,989                          |       | 193,588                        |       | 5 |   | 5 |   |
| Total                             |       | $                                | 216,568    |                           | $          | 218,682 |   | $ | 82 |   | $ | 83 |   |

 

Total gross proceeds from sales ofsecurities available for sale were $3,446,000 and $5,377,000, for the ninemonths ended September 30, 2010 and 2009, respectively.  The following table represents gross realizedgains and losses on those transactions:

 
| ** **                            | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|
| **(In Thousands)**               | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| Gross realized gains:                 |       |                                                    |       |   |   |
| U.S. Government and agency securities |       | $                                                       | —     |   | $ | — |   |
| State and political securities        |       | —                                                  |       | — |   |
| Other debt securities                 |       | 117                                                     |       | 180 |   |
| Equity securities                     |       | 56                                                      |       | 21 |   |
| Total gross realized gains            |       | $                                                       | 173        |   | $ | 201 |   |
|                                  |       |                                                    |       |   |   |
| Gross realized losses:                |       |                                                    |       |   |   |
| U.S. Government and agency securities |       | $                                                       | —     |   | $ | — |   |
| State and political securities        |       | —                                                  |       | — |   |
| Other debt securities                 |       | 11                                                      |       | 165 |   |
| Equity securities                     |       | —                                                  |       | 4,998 |   |
| Total gross realized losses           |       | $                                                       | 11         |   | $ | 5,163 |   |

 

Gross realized losses for the equitysecurities portfolio include impairment charges of $0 and $4,614,000 for thenine months ended September 30, 2010 and 2009, respectively.

 

**Note 5.  Federal Home Loan BankStock**

 

The Bank is a member of the Federal Home Loan Bank of Pittsburgh (the “FHLB”),which is one of 12 regional Federal Home Loan Banks. Each Federal Home LoanBank serves as a reserve or central bank for its members within its assignedregion.  It is funded primarily from funds deposited by memberinstitutions and proceeds from the sale of consolidated obligations of theFederal Home Loan Bank System. It makes loans to members (i.e., advances) inaccordance with policies and procedures established by the board of directorsof the Federal Home Loan Bank.  As a member, the Bank is required topurchase and maintain stock in the FHLB in an amount equal to the greater of 1%of its aggregate unpaid residential mortgage loans, home purchase contracts orsimilar obligations at the beginning of each year or 5% of its outstandingadvances from the FHLB.  At September 30, 2010, the Bank held$7,271,300 in stock of the FHLB, which was in compliance with this requirement.

 

The Company evaluated its holding ofFHLB stock for impairment and deemed the stock to not be impaired due to theexpected recoverability of the par value, which equals the value reflected 

 

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within the Company’s financial statements.  The decision was based on several itemsranging from the estimated true economic losses embedded within the FHLB’smortgage portfolio to the FHLB’s liquidity position and credit rating.  The Company utilizes the impairment frameworkoutlined in GAAP to evaluate FHLB stock for impairment.

 

The following factors were evaluated to determine the ultimaterecoverability of the par value of the Company’s FHLB stock holding; (i) thesignificance of the decline in net assets of the FHLB as compared to thecapital stock amount for the FHLB and the length of time this situation haspersisted; (ii) commitments by the FHLB to make payments required by law orregulation and the level of such payments in relation to the operatingperformance of the FHLB; (iii) the impact of legislative and regulatory changeson the institutions and, accordingly, on the customer base of the FHLB; (iv)the liquidity position of the FHLB; and (v) whether a decline is temporary orwhether it affects the ultimate recoverability of the FHLB stock based on (a)the materiality of the carrying amount to the member institution and (b)whether an assessment of the institution’s operational needs for theforeseeable future allow management to dispose of the stock.

 

Based on its analysis of these factors, the Company determined that itsholding of FHLB stock was not impaired on September 30, 2010.

 

**Note 6. Loans**

 

The allocation of the loan portfolio, by delinquencystatus, as of September 30, 2010 and December 31, 2009 is presentedbelow:

 

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| ** **                                          | ** ** | **September 30, 2010** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | ** **                       | ** ** | ** ** | ** ** | **Past Due** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                       | ** ** | ** ** | ** ** | **90 Days** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                       | ** ** | **Past Due** | ** ** | **Or More** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                       | ** ** | **30 To 89** | ** ** | **& Still** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| **(In Thousands)**                             | ** ** | **Current**                      | ** ** | **Days** | ** ** | **Accruing** | ** ** | **Accrual** | ** ** | **Total** | ** ** |
| Commercial and agricultural                         |       | $                                | 51,382     |   | $ | 158 |   | $ | — |   | $ | 4 |   | $ | 51,544 |   |
| Real estate mortgage:                               |       |                             |       |   |   |   |   |   |   |   |   |
| Residential                                         |       | 171,631                          |       | 1,153 |   | 344 |   | 520 |   | 173,648 |   |
| Commercial                                          |       | 150,911                          |       | 2,117 |   | 970 |   | 1,950 |   | 155,948 |   |
| Construction                                        |       | 19,781                           |       | — |   | — |   | 3,117 |   | 22,898 |   |
| Installment loans to individuals                    |       | 9,654                            |       | 187 |   | 3 |   | 10 |   | 9,854 |   |
|                                                |       | 403,359                          |       | $ | 3,615 |   | $ | 1,317 |   | $ | 5,601 |   | 413,892 |   |
| Less: Net deferred loan fees                        |       | 1,019                            |       |   |   |   |   |   |   | 1,019 |   |
|      Allowance  for loan losses |       | 5,479                            |       |   |   |   |   |   |   | 5,479 |   |
| Loans, net                                          |       | $                                | 396,861    |   |   |   |   |   |   |   | $ | 407,394 |   |

 
| ** **                                          | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | ** **                      | ** ** | ** ** | ** ** | **Past Due** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                      | ** ** | ** ** | ** ** | **90 Days** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                      | ** ** | **Past Due** | ** ** | **Or More** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                      | ** ** | **30 To 90** | ** ** | **& Still** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| **(In Thousands)**                             | ** ** | **Current**                     | ** ** | **Days** | ** ** | **Accruing** | ** ** | **Accrual** | ** ** | **Total** | ** ** |
| Commercial and agricultural                         |       | $                               | 45,930     |   | $ | 457 |   | $ | 182 |   | $ | 78 |   | $ | 46,647 |   |
| Real estate mortgage:                               |       |                            |       |   |   |   |   |   |   |   |   |
| Residential                                         |       | 165,313                         |       | 7,333 |   | 951 |   | 749 |   | 174,346 |   |
| Commercial                                          |       | 147,455                         |       | 2,860 |   | 1,429 |   | 465 |   | 152,209 |   |
| Construction                                        |       | 18,247                          |       | 2,992 |   | — |   | 556 |   | 21,795 |   |
| Installment loans to individuals                    |       | 11,192                          |       | 311 |   | 3 |   | 43 |   | 11,549 |   |
|                                                |       | 388,137                         |       | $ | 13,953 |   | $ | 2,565 |   | $ | 1,891 |   | 406,546 |   |
| Less: Net deferred loan fees                        |       | 1,017                           |       |   |   |   |   |   |   | 1,017 |   |
|      Allowance  for loan losses |       | 4,657                           |       |   |   |   |   |   |   | 4,657 |   |
| Loans, net                                          |       | $                               | 382,463    |   |   |   |   |   |   |   | $ | 400,872 |   |

 

Therecorded investment in loans for which impairment has been recognized amountedto $8,259,000 at September 30, 2010, compared to $8,312,000 at December 31,2009.  The valuation allowance related toimpaired loans amounted to $1,053,000 at September 30, 2010 and $802,000at December 31, 2009.  The increasein the valuation allowance is primarily from a few commercial relationships.

 

Aloan is considered impaired, based on current information and events, if it isprobable that the Bank will be unable to collect the scheduled payments ofprincipal or interest when due according to the contractual terms of the loanagreement. The measurement of impaired loans is generally based on the presentvalue of expected future cash flows discounted at the historical effectiveinterest rate, except that all collateral-dependent loans are measured forimpairment based on the fair value of the collateral.

 

**Note 7.****  Net Periodic Benefit Cost-DefinedBenefit Plans**

 

Fora detailed disclosure on the Company’s pension and employee benefits plans,please refer to Note 12 of the Company’s Consolidated Financial Statementsincluded in the Annual Report on Form 10-K for the year ended December 31,2009.

 

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Thefollowing sets forth the components of the net periodic benefit cost of thedomestic non-contributory defined benefit plan for the nine months ended September 30,2010 and 2009, respectively:

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In Thousands)**               | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Service cost                          |       | $                                | 132        |                            | $          | 136 |   | $ | 395 |   | $ | 408 |   |
| Interest cost                         |       | 170                              |       | 170                             |       | 512 |   | 510 |   |
| Expected return on plan assets        |       | (160                             | )          | (127                            | )          | (481 | ) | (381 | ) |
| Amortization of transition obligation |       | (1                               | )          | (1                              | )          | (3 | ) | (2 | ) |
| Amortization of prior service cost    |       | 6                                |       | 6                               |       | 19 |   | 19 |   |
| Amortization of net loss              |       | 36                               |       | 85                              |       | 109 |   | 254 |   |
| Net periodic cost                     |       | $                                | 183        |                            | $          | 269 |   | $ | 551 |   | $ | 808 |   |

 

Thefollowing table sets forth by level, within the fair value hierarchy detailedin Note 10 (Fair Value Measurements), the Plan’s assets at fair value as of September 30,2010:

 
| ** **                          | ** ** | **September 30, 2010** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| **(In Thousands)**             | ** ** | **Level I**                 | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
| Assets:                             |       |                             |       |   |   |   |   |   |   |
| Cash and cash equivalents           |       | $                                | 260        |   | $ | — |   | $ | — |   | $ | 260 |   |
| Mutual funds - taxable fixed income |       | 3,118                            |       | — |   | — |   | 3,118 |   |
| Mutual funds - domestic equity      |       | 3,815                            |       | — |   | — |   | 3,815 |   |
| Mutual funds - international equity |       | 1,333                            |       | — |   | — |   | 1,333 |   |
| Total assets at fair value          |       | $                                | 8,526      |   | $ | — |   | $ | — |   | $ | 8,526 |   |

 

**Employer Contributions**

 

TheCompany previously disclosed in its consolidated financial statements, includedin the Annual Report on Form 10-K for the year ended December 31,2009, that it expected to contribute a minimum of $400,000 to its definedbenefit plan in 2010.  As of September 30, 2010, there werecontributions of $344,000 made to the plan.

 

**Note 8.  Employee Stock PurchasePlan**

 

TheCompany maintains the Penns Woods Bancorp, Inc. 2006 Employee StockPurchase Plan (“Plan”). The Plan is intended to encourage employeeparticipation in the ownership and economic progress of the Company.  The Plan allows for up to 1,000,000 shares tobe purchased by employees.  The purchaseprice of the shares is 95% of market value with an employee eligible topurchase up to the lesser of 15% of base compensation or $12,000 in marketvalue annually.  During the nine monthsended September 30, 2010 and 2009, there were 1,729 and 1,991 sharesissued under the plan, respectively.

 

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**Note9.  Off Balance Sheet Risk**

 

The Company is a party to financial instrumentswith off-balance sheet risk in the normal course of business to meet thefinancing needs of its customers.  Thesefinancial instruments are primarily comprised of commitments to extend creditand standby letters of credit.  Theseinstruments involve, to varying degrees, elements of credit, interest rate, orliquidity risk in excess of the amount recognized in the consolidated balancesheet.  The contract amounts of theseinstruments express the extent of involvement the Company has in particularclasses of financial instruments.

 

The Company’s exposure to credit loss fromnonperformance by the other party to the financial instruments for commitmentsto extend credit and standby letters of credit is represented by thecontractual amount of these instruments. The Company uses the same credit policies in making commitments andconditional obligations as it does for on-balance sheet instruments.  The Company may require collateral or othersecurity to support financial instruments with off-balance sheet credit risk.

 

Financial instruments whose contract amountsrepresent credit risk are as follows at September 30, 2010 and December 31,2009:

 
| ** **                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In Thousands)**      | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Commitments to extend credit |       | $                      | 83,424     |                  | $          | 80,061 |   |
| Standby letters of credit    |       | 1,281                  |       | 1,334                 |       |
|                              |            |                        |            |                       |            |  |  |

 

Commitmentsto extend credit are legally binding agreements to lend to customers.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of fees.  Since many of the commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future liquidity requirements.  The Company evaluates each customer’s creditworthiness on a case-by-case basis.  Theamount of collateral obtained, if deemed necessary by the Company, on anextension of credit is based on management’s credit assessment of thecounterparty.

 

Standbyletters of credit represent conditional commitments issued by the Company toguarantee the performance of a customer to a third party.  These instruments are issued primarily tosupport bid or performance related contracts. The coverage period for these instruments is typically a one year periodwith an annual renewal option subject to prior approval by management.  Fees earned from the issuance of these lettersare recognized upon expiration of the coverage period.  For secured letters of credit, the collateralis typically Bank deposit instruments or customer business assets.

 

**Note 10.  Fair Value Measurements**

 

Thefollowing disclosures show the hierarchal disclosure framework associated withthe level of pricing observations utilized in measuring assets and liabilitiesat fair value.

 
| Level  I: |   | Quoted  prices are available in active markets for identical assets or liabilities as  of the |
|-----------|--------|-----------------------------------------------------------------------------------------------|

 

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|        |   | reported  date.                                                                                                                                                                                                                                                                                                                                                                                 |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| Level  II:  |   | Pricing  inputs are other than quoted prices in active markets, which are either  directly or indirectly observable as of the reported date. The nature of  these assets and liabilities include items for which quoted prices are  available but traded less frequently, and items that are fair valued using  other financial instruments, the parameters of which can be directly  observed. |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| Level  III: |   | Assets  and liabilities that have little to no pricing observability as of the  reported date. These items do not have two-way markets and are measured using  management’s best estimate of fair value, where the inputs into the  determination of fair value require significant management judgment or  estimation.                                                                    |

 

Thishierarchy requires the use of observable market data when available.

 

Thefollowing table presents the assets reported on the balance sheet at their fairvalue on a recurring basis as of September 30, 2010 and December 31,2009, by level within the fair value hierarchy. Financial assets andliabilities are classified in their entirety based on the lowest level of inputthat is significant to the fair value measurement.

 
| ** **                                 | ** ** | **September 30, 2010** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| **(In Thousands)**                    | ** ** | **Level I**                 | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|                                       |       |                             |       |   |   |   |   |   |   |
| Assets measured on a recurring basis:      |       |                             |       |   |   |   |   |   |   |
| Investment securities, available for sale  |       |                             |       |   |   |   |   |   |   |
| U.S. Government and agency securities      |       | $                                | —     |   | $ | 29,378 |   | $ | — |   | $ | 29,378 |   |
| State and political securities             |       | —                           |       | 169,488 |   | — |   | 169,488 |   |
| Other debt securties                       |       | —                           |       | 19,816 |   | — |   | 19,816 |   |
| Equity securities                          |       | 13,376                           |       | — |   | — |   | 13,376 |   |
| Total assets measured on a recurring basis |       | $                                | 13,376     |   | $ | 218,682 |   | $ | — |   | $ | 232,058 |   |

 
| ** **                                 | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| **(In Thousands)**                    | ** ** | **Level I**                | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|                                       |       |                            |       |   |   |   |   |   |   |
| Assets measured on a recurring basis:      |       |                            |       |   |   |   |   |   |   |
| Investment securities, available for sale: |       |                            |       |   |   |   |   |   |   |
| U.S. Government and agency securities      |       | $                               | —     |   | $ | 39,136 |   | $ | — |   | $ | 39,136 |   |
| State and political securities             |       | —                          |       | 144,877 |   | — |   | 144,877 |   |
| Other debt securties                       |       | —                          |       | 12,976 |   | — |   | 12,976 |   |
| Equity securities                          |       | 11,779                          |       | — |   | — |   | 11,779 |   |
| Total assets measured on a recurring basis |       | $                               | 11,779     |   | $ | 196,989 |   | $ | — |   | $ | 208,768 |   |

 

Thefollowing table presents the assets reported on the Consolidated Balance Sheetat their fair value on a non-recurring basis as of September 30, 2010 and December 31,2009, by level within the fair value hierarchy. Financial assets andliabilities are classified in their entirety based on the lowest level of inputthat is significant to the fair value measurement.

 

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| ** **                                     | ** ** | **September 30, 2010** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| **(In Thousands)**                        | ** ** | **Level I**                 | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|                                           |       |                             |       |   |   |   |   |   |   |
| Assets measured on a non-recurring basis:      |       |                             |       |   |   |   |   |   |   |
| Impaired Loans                                 |       | $                                | —     |   | $ | 7,206 |   | $ | — |   | $ | 7,206 |   |
| Other real estate owned                        |       | —                           |       | 679 |   | — |   | 679 |   |
| Total assets measured on a non-recurring basis |       | $                                | —     |   | $ | 7,885 |   | $ | — |   | $ | 7,885 |   |

 
| ** **                                     | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|
| **(In Thousands)**                        | ** ** | **Level I**                | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|                                           |       |                            |       |   |   |   |   |   |   |
| Assets measured on a non-recurring basis:      |       |                            |       |   |   |   |   |   |   |
| Impaired Loans                                 |       | $                               | —     |   | $ | 7,510 |   | $ | — |   | $ | 7,510 |   |
| Other real estate owned                        |       | —                          |       | 672 |   | — |   | 672 |   |
| Total assets measured on a non-recurring basis |       | $                               | —     |   | $ | 8,182 |   | $ | — |   | $ | 8,182 |   |

 

**Note 11.Estimated Fair Value of Financial Instruments**

 

The Company is required todisclose estimated fair values for its financial instruments.  Fair value estimates are made at a specificpoint in time, based on relevant market information and information about thefinancial instrument.  These estimates donot reflect any premium or discount that could result from offering for sale atone time the Company’s entire holdings of a particular financialinstrument.  Also, it is the Company’sgeneral practice and intention to hold most of its financial instruments tomaturity and not to engage in trading or sales activities.  Because no market exists for a significantportion of the Company’s financial instruments, fair value estimates are basedon judgments regarding future expected loss experience, current economicconditions, risk characteristics of various financial instruments, and otherfactors.  These estimates are subjectivein nature and involve uncertainties and matters of significant judgment andtherefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.

 

Estimated fair values havebeen determined by the Company using historical data and an estimationmethodology suitable for each category of financial instruments.  The Company’s fair value estimates, methods,and assumptions are set forth below for the Company’s other financialinstruments.

 

As certain assets andliabilities, such as deferred tax assets, premises and equipment, and manyother operational elements of the Company, are not considered financialinstruments but have value, this estimated fair value of financial instrumentswould not represent the full market value of the Company.

 

The estimated fair values ofthe Company’s financial instruments are as follows at September 30, 2010and December 31, 2009:

 

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| ** **                   | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **Carrying**                     | ** ** | **Fair**                        | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| **(In Thousands)**      | ** ** | **Value**                        | ** ** | **Value**                       | ** ** | **Value** | ** ** | **Value** | ** ** |
| Financial assets:            |       |                             |       |                            |       |   |   |   |   |
| Cash and cash equivalents    |       | $                                | 23,057     |                            | $          | 23,057 |   | $ | 13,788 |   | $ | 13,788 |   |
| Investment securities:       |       |                             |       |                            |       |   |   |   |   |
| Available for sale           |       | 232,058                          |       | 232,058                         |       | 208,768 |   | 208,768 |   |
| Held to maturity             |       | 82                               |       | 83                              |       | 107 |   | 108 |   |
| Loans held for sale          |       | 5,360                            |       | 5,360                           |       | 4,063 |   | 4,063 |   |
| Loans, net                   |       | 407,394                          |       | 408,167                         |       | 400,872 |   | 403,279 |   |
| Bank-owned life insurance    |       | 15,345                           |       | 15,345                          |       | 14,942 |   | 14,942 |   |
| Accrued interest receivable  |       | 3,657                            |       | 3,657                           |       | 3,523 |   | 3,523 |   |
|                         |       |                             |       |                            |       |   |   |   |   |
| Financial liabilities:       |       |                             |       |                            |       |   |   |   |   |
| Interest-bearing deposits    |       | $                                | 442,042    |                            | $          | 444,587 |   | $ | 417,388 |   | $ | 408,056 |   |
| Noninterest-bearing deposits |       | 92,128                           |       | 92,128                          |       | 79,899 |   | 79,899 |   |
| Short-term borrowings        |       | 14,629                           |       | 14,629                          |       | 18,354 |   | 18,354 |   |
| Long-term borrowings, FHLB   |       | 81,778                           |       | 88,289                          |       | 86,778 |   | 89,082 |   |
| Accrued interest payable     |       | 832                              |       | 832                             |       | 1,073 |   | 1,073 |   |

 

**Cashand Cash Equivalents, Loans Held for Sale, Accrued Interest Receivable,Short-term Borrowings, and Accrued Interest Payable:**

 

The fair value is equal tothe carrying value.

 

**InvestmentSecurities:**

 

The fair value of investmentsecurities available for sale and held to maturity is equal to the availablequoted market price. If no quoted market price is available, fair value isestimated using the quoted market price for similar securities.  Regulatory stocks’ fair value is equal to thecarrying value.

 

**Loans:**

 

Fair values are estimatedfor portfolios of loans with similar financial characteristics.  Loans are segregated by type such ascommercial, commercial real estate, residential real estate, construction realestate, and installment loans to individuals. Each loan category is further segmented into fixed and adjustable rateinterest terms and by performing and nonperforming categories.

 

The fair value of performing loans is calculatedby discounting scheduled cash flows through the estimated maturity usingestimated market discount rates that reflect the credit and interest rate riskinherent in the loan.  The estimate ofmaturity is based on the Company’s historical experience with repayments foreach loan classification, modified, as required, by an estimate of the effectof current economic and lending conditions.

 

Fair value for significantnonperforming loans is based on recent external appraisals.  If appraisals are not available, estimatedcash flows are discounted using a rate commensurate with the risk associatedwith the estimated cash flows. Assumptions regarding credit risk, cash flows, and discounted rates arejudgmentally determined using available market information and specificborrower information.

 

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**Bank-OwnedLife Insurance:**

 

The fair value is equal tothe cash surrender value of the life insurance policies.

 

**Deposits:**

 

The fair value of depositswith no stated maturity, such as noninterest-bearing demand deposits, savings,NOW, and money market accounts, is equal to the amount payable on demand.  The fair value of certificates of deposit isbased on the discounted value of contractual cash flows.

 

The fair value estimatesabove do not include the benefit that results from the low-cost fundingprovided by the deposit liabilities compared to the cost of borrowing funds inthe market, commonly referred to as the core deposit intangible.

 

**LongTerm Borrowings:**

 

The fair value of long termborrowings is based on the discounted value of contractual cash flows.

 

**Commitmentsto Extend Credit, Standby Letters of Credit, and Financial Guarantees Written:**

 

There is no material difference between the notional amount and theestimated fair value of off-balance sheet items.  The contractual amounts of unfundedcommitments and letters of credit are presented in Note 9.

 

**Note 12.  Reclassification ofComparative Amounts**

 

Certaincomparative amounts for the prior period have been reclassified to conform tocurrent period presentations. Such reclassifications had no effect on netincome or shareholders’ equity.

 

**CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATIONREFORM ACT OF 1995**

 

ThisReport contains certain “forward-looking statements” including statementsconcerning plans, objectives, future events or performance and assumptions andother statements which are other than statements of historical fact.  The Company cautions readers that thefollowing important factors, among others, may have affected and could in thefuture affect the Company’s actual results and could cause the Company’s actualresults for subsequent periods to differ materially from those expressed in anyforward-looking statement made by or on behalf of the Company herein:  (i) the effect of changes in laws andregulations, including federal and state banking laws and regulations, withwhich the Company must comply, and the associated costs of compliance with suchlaws and regulations either currently or in the future as applicable; (ii) theeffect of changes in accounting policies and practices, as may be adopted bythe regulatory agencies as well as by the Financial Accounting Standards Board,or of changes in the Company’s organization, compensation and benefit plans; (iii) theeffect on the Company’s competitive position within its market area of the  increasing consolidation within the bankingand financial services industries, including the increased competition fromlarger regional and out-of-state banking organizations as well as non-bankproviders of various financial services; (iv) the effect of changes ininterest rates; and (v) the effect of changes in the business cycle anddownturns in the local, regional or national economies.

 

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Youshould not put undue reliance on any forward-looking statements.  These statements speak only as of the date ofthis Quarterly Report on Form 10-Q, even if subsequently made available bythe Company on its website or otherwise. The Company undertakes no obligation to update or revise thesestatements to reflect events or circumstances occurring after the date of thisQuarterly Report on Form 10-Q.

 

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**Item 2.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operation**

 

**EARNINGS SUMMARY**

 

**Comparisonof the Three and Nine Months Ended September 30, 2010 and 2009**

 

**SummaryResults**

 

Netincome for the three months ended September 30, 2010 was $2,848,000compared to $1,922,000 for the same period of 2009 as after-tax securitieslosses decreased $407,000 (from a loss of $335,000 to a gain of $72,000).  Basic and diluted earnings per share for thethree months ended September 30, 2010 were $0.74 compared to $0.50 for thethree months ended September 30, 2009. Return on average assets and return on average equity were 1.60% and15.51% for the three months ended September 30, 2010 compared to 1.15% and12.08% for the corresponding period of 2009. Net income from core operations (“operating earnings”) increased to$2,776,000 for the three months ended September 30, 2010 compared to$2,257,000 for the same period of 2009. Operating earnings per share for the three months ended September 30,2010 were $0.72 basic and dilutive compared to $0.59 basic and dilutive for thethree months ended September 30, 2009.

 

Thenine months ended September 30, 2010 generated net income of $8,068,000compared to $3,593,000 for the same period of 2009.  Comparable results were impacted by adecrease in after-tax securities losses of $3,382,000 (from a loss of$3,275,000 to a gain of $107,000). Earnings per share, basic and diluted, forthe nine months ended September 30, 2010 were $2.10 compared to $0.94 forthe comparable period of 2009.  Return onaverage assets and return on average equity were 1.54% and 15.21% for the ninemonths ended September 30, 2010 compared to 0.73% and 7.80% for thecorresponding period of 2009.  Operatingearnings increased 15.9% to $7,961,000 for the nine months ended September 30,2010 compared to $6,868,000 for the comparable period of 2009, resulting inbasic and dilutive operating earnings per share increasing 16.2% to $2.08 from$1.79 for the nine months ended September 30, 2010 and 2009, respectively.

 

Managementuses the non-GAAP measure of net income from core operations, or operatingearnings, in its analysis of the Company’s performance.  This measure, as used by the Company, adjustsnet income by excluding significant gains or losses that are unusual innature.  Because certain of these itemsand their impact on the Company’s performance are difficult to predict,management believes the presentation of financial measures excluding the impactof such items provides useful supplemental information in evaluating theoperating results of the Company’s core businesses.  For purposes of this Quarterly Report on Form 10-Q,net income from core operations, or operating earnings, means net incomeadjusted to exclude after-tax net securities gains or losses.  These disclosures should not be viewed as asubstitute for net income determined in accordance with GAAP, nor are theynecessarily comparable to non-GAAP performance measures that may be presentedby other companies.

 

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**Reconciliation of GAAP and non-GAAP Income**

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(Dollars in Thousands, Except Per Share Data)** | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| GAAP net income                                                                 |       | $                                | 2,848      |                            | $          | 1,922 |   | $ | 8,068 |   | $ | 3,593 |   |
| Less: securities gains (losses), net of tax                                     |       | 72                               |       | (335                            | )          | 107 |   | (3,275 | ) |
| Non-GAAP operating earnings                                                     |       | $                                | 2,776      |                            | $          | 2,257 |   | $ | 7,961 |   | $ | 6,868 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **                                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                      | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Return on average assets (ROA)                                                  |       | 1.60                             | %          | 1.15                            | %          | 1.54 | % | 0.73 | % |
| Less: securities gains (losses), net of tax                                     |       | 0.04                             | %          | -0.20                           | %          | 0.02 | % | -0.66 | % |
| Non-GAAP operating ROA                                                          |       | 1.56                             | %          | 1.35                            | %          | 1.52 | % | 1.39 | % |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **                                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                      | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Return on average equity (ROE)                                                  |       | 15.51                            | %          | 12.08                           | %          | 15.21 | % | 7.80 | % |
| Less: securities gains (losses), net of tax                                     |       | 0.39                             | %          | -2.11                           | %          | 0.21 | % | -7.11 | % |
| Non-GAAP operating ROE                                                          |       | 15.12                            | %          | 14.19                           | %          | 15.00 | % | 14.91 | % |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **                                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                      | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Basic earnings per share (EPS)                                                  |       | $                                | 0.74       |                            | $          | 0.50 |   | $ | 2.10 |   | $ | 0.94 |   |
| Less: securities gains (losses), net of tax                                     |       | 0.02                             |       | (0.09                           | )          | 0.02 |   | (0.85 | ) |
| Non-GAAP basic operating EPS                                                    |       | $                                | 0.72       |                            | $          | 0.59 |   | $ | 2.08 |   | $ | 1.79 |   |

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                  | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Dilutive EPS                                |       | $                                | 0.74       |                            | $          | 0.50 |   | $ | 2.10 |   | $ | 0.94 |   |
| Less: securities gains (losses), net of tax |       | 0.02                             |       | (0.09                           | )          | 0.02 |   | (0.85 | ) |
| Non-GAAP dilutive operating EPS             |       | $                                | 0.72       |                            | $          | 0.59 |   | $ | 2.08 |   | $ | 1.79 |   |

 

**Interestand Dividend Income**

 

Interestand dividend income for the three months ended September 30, 2010increased $69,000 to $9,182,000 compared to $9,113,000 for the same period of2009.  The increase in interest incomewas led by an increase in investment portfolio interest resulting from growthin the average investment portfolio of $19,374,000.  The growth offset a decline in the averagetaxable equivalent yield of 36 basis points (“bp”).  The decrease in loan portfolio income was theresult of portfolio growth that was more than offset by a yield that decreasedby 27 bp.  The decline in yield earned onboth loans and investments is the result of the low interest rate environmentthat has existed over the past year.

 

Duringthe nine months ended September 30, 2010, interest and dividend incomeincreased $252,000 over the same period in 2009.  Interest income on the loan portfolioincreased as the 

 

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growthin the portfolio countered a 27 bp decline in average yield.  The investment portfolio interest incomeincreased as portfolio growth offset a decline in yield and a reduction individends received.  The reduced level ofdividend income is the result of a decreased level of equity investment andgeneral decline in dividends paid by the holdings in our portfolio.

 

Interestand dividend income composition for the three and nine months ended September 30,2010 and 2009 was as follows:

 
| ** **                         | ** ** | **For The Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|
| ** **                         | ** ** | **September 30, 2010**                   | ** ** | **September 30, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**            | ** ** | **Amount**                                         | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Loans including fees               |       | $                                                  | 6,434      |   | 70.1 | % | $ | 6,457 |   | 70.9 | % | $ | (23 | ) | (0.4 | )% |
| Investment securities:             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                            |       | 1,428                                              |       | 15.5 |   | 1,368 |   | 15.0 |   | 60 |   | 4.4 |   |
| Tax-exempt                         |       | 1,266                                              |       | 13.8 |   | 1,253 |   | 13.7 |   | 13 |   | 1.0 |   |
| Dividend and other interest income |       | 54                                                 |       | 0.6 |   | 35 |   | 0.4 |   | 19 |   | 54.3 |   |
| Total interest and dividend income |       | $                                                  | 9,182      |   | 100.0 | % | $ | 9,113 |   | 100.0 | % | $ | 69 |   | 0.8 | % |

 
| ** **                         | ** ** | **For The Nine Months Ended** | ** ** |
|------------------------------------|------------|---------------------------------------------------|------------|
| ** **                         | ** ** | **September 30, 2010**                  | ** ** | **September 30, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**            | ** ** | **Amount**                                        | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Loans including fees               |       | $                                                 | 19,162     |   | 70.2 | % | $ | 19,025 |   | 70.4 | % | $ | 137 |   | 0.7 | % |
| Investment securities:             |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                            |       | 4,182                                             |       | 15.3 |   | 4,105 |   | 15.2 |   | 77 |   | 1.9 |   |
| Tax-exempt                         |       | 3,794                                             |       | 13.9 |   | 3,748 |   | 13.9 |   | 46 |   | 1.2 |   |
| Dividend and other interest income |       | 157                                               |       | 0.6 |   | 165 |   | 0.5 |   | (8 | ) | (4.8 | ) |
| Total interest and dividend income |       | $                                                 | 27,295     |   | 100.0 | % | $ | 27,043 |   | 100.0 | % | $ | 252 |   | 0.9 | % |

 

**InterestExpense**

 

Interestexpense for the three months ended September 30, 2010 decreased $744,000to $2,424,000 compared to $3,168,000 for the same period of 2009.  The substantial decrease associated withdeposits is primarily the result of a reduction of 86 bp in rate paid on timedeposits and a shift from higher cost time deposits to core deposits.  Factors that led to the rate decreasesinclude, but are not limited to, Federal Open Market Committee (“FOMC”)interest rate actions and campaigns conducted by the Company during the pasttwo years to attract short-term CDs resulting in an increased repricingfrequency.  In addition, the MarcellusShale natural gas exploration in north central Pennsylvania is creatingopportunities to create new and build upon existing deposit relationships.  Short-term borrowings interest expensedecreased as the impact of a declining average rate paid compensated for aslight increase in the average balance. Long-term borrowing interest expense decreased modestly due to thematurity of $5,000,000 that carried an interest rate of 6.65%.

 

Interestexpense for the nine months ended September 30, 2010 decreased 19.1% fromthe same period of 2009.  The reasonsnoted for the decline in interest expense for the three month period comparisonalso apply to the nine month period.

 

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Interestexpense composition for the three and nine months ended September 30, 2010and 2009 was as follows:

 
| ** **                 | ** ** | **For The Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|
| ** **                 | ** ** | **September 30, 2010**                   | ** ** | **September 30, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**    | ** ** | **Amount**                                         | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposits                   |       | $                                                  | 1,458      |   | 60.1 | % | $ | 2,148 |   | 67.8 | % | $ | (690 | ) | (32.1 | )% |
| Short-term borrowings      |       | 77                                                 |       | 3.2 |   | 82 |   | 2.6 |   | (5 | ) | (6.1 | ) |
| Long-term borrowings, FHLB |       | 889                                                |       | 36.7 |   | 938 |   | 29.6 |   | (49 | ) | (5.2 | ) |
| Total interest expense     |       | $                                                  | 2,424      |   | 100.0 | % | $ | 3,168 |   | 100.0 | % | $ | (744 | ) | (23.5 | )% |

 
| ** **                 | ** ** | **For The Nine Months Ended** | ** ** |
|----------------------------|------------|---------------------------------------------------|------------|
| ** **                 | ** ** | **September 30, 2010**                  | ** ** | **September 30, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**    | ** ** | **Amount**                                        | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposits                   |       | $                                                 | 4,719      |   | 61.7 | % | $ | 6,357 |   | 67.2 | % | $ | (1,638 | ) | (25.8 | )% |
| Short-term borrowings      |       | 197                                               |       | 2.6 |   | 318 |   | 3.4 |   | (121 | ) | (38.1 | ) |
| Long-term borrowings, FHLB |       | 2,733                                             |       | 35.7 |   | 2,781 |   | 29.4 |   | (48 | ) | (1.7 | ) |
| Total interest expense     |       | $                                                 | 7,649      |   | 100.0 | % | $ | 9,456 |   | 100.0 | % | $ | (1,807 | ) | (19.1 | )% |

 

**Net Interest Margin**

 

Thenet interest margin (“NIM”) for the three months ended September 30, 2010was 4.56% compared to 4.35% for the corresponding period of 2009.  The increase in the NIM was driven by a 65 bpdecline in the rate paid on interest bearing liabilities that more thancompensated for a 37 bp decline in the yield on interest earning assets.  The decrease in earning asset yield is due tothe impact on the loan and investment portfolios of the current low rateenvironment.  The decrease in the cost ofinterest bearing liabilities to 1.76% from 2.41% was driven by a reduction inthe rate paid on time deposits of 86 bp. The reduction in the rate paid on time deposits was the result of ashortening of the time deposit portfolio that has resulted in an increasingrepricing frequency during this period of low rates.  The duration of the time deposit portfoliohas been lengthening due to the apparent bottoming or near bottoming of depositrates.  The average rate on long-termborrowings declined due to the maturity of $5,000,000 in FHLB borrowings thatcarried a rate of 6.65%.

 

TheNIM for the nine months ended September 30, 2010 was 4.54% compared to4.39% for the same period of 2009.  Theimpact of the items mentioned in the three month discussion also applies to thenine month period.  An 80 bp decline inthe rate paid on time deposits served as the foundation for a 71 bp decline inrate paid on deposits, while the FOMC and general market actions affected theyield on earning assets and cost of short-term borrowings.

 

Thefollowing is a schedule of average balances and associated yields for the threeand nine months ended September 30, 2010 and 2009:

 

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| ** **                                      | ** ** | **AVERAGE BALANCES AND INTEREST RATES** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Three Months Ended**                            | ** ** | **Three Months Ended** | ** ** |
| ** **                                      | ** ** | **September 30, 2010**                            | ** ** | **September 30, 2009** | ** ** |
| **(In Thousands)**                         | ** ** | **Average Balance**                                    | ** ** | **Interest** | ** ** | **Average Rate** | ** ** | **Average Balance** | ** ** | **Interest** | ** ** | **Average Rate** | ** ** |
| Assets:                                         |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt loans                                |       | $                                                           | 18,595     |   | $ | 309 |   | 6.59 | % | $ | 17,207 |   | $ | 279 |   | 6.43 | % |
| All other loans                                 |       | 397,672                                                     |       | 6,230 |   | 6.22 | % | 382,670 |   | 6,273 |   | 6.50 | % |
| Total loans                                     |       | 416,267                                                     |       | 6,539 |   | 6.23 | % | 399,877 |   | 6,552 |   | 6.50 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Taxable securities                              |       | 118,344                                                     |       | 1,480 |   | 5.00 | % | 104,905 |   | 1,402 |   | 5.35 | % |
| Tax-exempt securities                           |       | 110,654                                                     |       | 1,918 |   | 6.93 | % | 104,719 |   | 1,898 |   | 7.25 | % |
| Total securities                                |       | 228,998                                                     |       | 3,398 |   | 5.94 | % | 209,624 |   | 3,300 |   | 6.30 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing deposits                       |       | 11,958                                                      |       | 2 |   | 0.07 | % | 4,218 |   | 1 |   | 0.09 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                   |       | 657,223                                                     |       | 9,939 |   | 6.02 | % | 613,719 |   | 9,853 |   | 6.39 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Other assets                                    |       | 52,793                                                      |       |   |   |   |   | 54,284 |   |   |   |   |   |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                                    |       | $                                                           | 710,016    |   |   |   |   |   | $ | 668,003 |   |   |   |   |   |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities and shareholders’ equity:      |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Savings                                         |       | $                                                           | 66,464     |   | 46 |   | 0.27 | % | $ | 62,265 |   | 85 |   | 0.54 | % |
| Super Now deposits                              |       | 66,188                                                      |       | 95 |   | 0.57 | % | 60,476 |   | 127 |   | 0.83 | % |
| Money market deposits                           |       | 106,111                                                     |       | 299 |   | 1.12 | % | 71,204 |   | 345 |   | 1.92 | % |
| Time deposits                                   |       | 204,801                                                     |       | 1,018 |   | 1.97 | % | 222,816 |   | 1,591 |   | 2.83 | % |
| Total interest-bearing deposits                 |       | 443,564                                                     |       | 1,458 |   | 1.30 | % | 416,761 |   | 2,148 |   | 2.04 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings                           |       | 16,356                                                      |       | 77 |   | 1.87 | % | 15,457 |   | 82 |   | 2.13 | % |
| Long-term borrowings, FHLB                      |       | 83,952                                                      |       | 889 |   | 4.14 | % | 86,778 |   | 938 |   | 4.23 | % |
| Total borrowings                                |       | 100,308                                                     |       | 966 |   | 3.77 | % | 102,235 |   | 1,020 |   | 3.91 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities              |       | 543,872                                                     |       | 2,424 |   | 1.76 | % | 518,996 |   | 3,168 |   | 2.41 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                 |       | 84,263                                                      |       |   |   |   |   | 75,114 |   |   |   |   |   |
| Other liabilities                               |       | 8,447                                                       |       |   |   |   |   | 10,256 |   |   |   |   |   |
| Shareholders’ equity                       |       | 73,434                                                      |       |   |   |   |   | 63,637 |   |   |   |   |   |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity |       | $                                                           | 710,016    |   |   |   |   |   | $ | 668,003 |   |   |   |   |   |
| Interest rate spread                            |       |                                                        |       |   |   | 4.26 | % |   |   |   |   | 3.97 | % |
| Net interest income/margin                      |       |                                                        |       | $ | 7,515 |   | 4.56 | % |   |   | $ | 6,685 |   | 4.35 | % |

 

1.               Information onthis table has been calculated using average daily balance sheets to obtainaverage balances.

2.               Nonaccrualloans have been included with loans for the purpose of analyzing net interestearnings.

3.               Income andrates on a fully taxable equivalent basis include an adjustment for thedifference between annual income from tax-exempt obligations and the taxableequivalent of such income at the standard 34% tax rate.

 

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| ** **                                      | ** ** | **AVERAGE BALANCES AND INTEREST RATES** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Nine Months Ended**                             | ** ** | **Nine Months Ended** | ** ** |
| ** **                                      | ** ** | **September 30, 2010**                            | ** ** | **September 30, 2009** | ** ** |
| **(In Thousands)**                         | ** ** | **Average Balance**                                    | ** ** | **Interest** | ** ** | **Average Rate** | ** ** | **Average Balance** | ** ** | **Interest** | ** ** | **Average Rate** | ** ** |
| Assets:                                         |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt loans                                |       | $                                                           | 18,148     |   | $ | 914 |   | 6.73 | % | $ | 16,682 |   | $ | 817 |   | 6.55 | % |
| All other loans                                 |       | 397,303                                                     |       | 18,559 |   | 6.25 | % | 378,043 |   | 18,486 |   | 6.54 | % |
| Total loans                                     |       | 415,451                                                     |       | 19,473 |   | 6.27 | % | 394,725 |   | 19,303 |   | 6.54 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Taxable securities                              |       | 112,552                                                     |       | 4,334 |   | 5.13 | % | 102,937 |   | 4,269 |   | 5.53 | % |
| Tax-exempt securities                           |       | 108,573                                                     |       | 5,748 |   | 7.06 | % | 103,418 |   | 5,679 |   | 7.32 | % |
| Total securities                                |       | 221,125                                                     |       | 10,082 |   | 6.08 | % | 206,355 |   | 9,948 |   | 6.43 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing deposits                       |       | 9,504                                                       |       | 5 |   | 0.07 | % | 1,886 |   | 1 |   | 0.07 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                   |       | 646,080                                                     |       | 29,560 |   | 6.11 | % | 602,966 |   | 29,252 |   | 6.48 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Other assets                                    |       | 54,221                                                      |       |   |   |   |   | 55,080 |   |   |   |   |   |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                                    |       | $                                                           | 700,301    |   |   |   |   |   | $ | 658,046 |   |   |   |   |   |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities and shareholders’ equity:      |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Savings                                         |       | $                                                           | 64,759     |   | 144 |   | 0.30 | % | $ | 61,106 |   | 244 |   | 0.53 | % |
| Super Now deposits                              |       | 64,733                                                      |       | 296 |   | 0.61 | % | 57,028 |   | 387 |   | 0.91 | % |
| Money market deposits                           |       | 98,289                                                      |       | 878 |   | 1.19 | % | 59,061 |   | 924 |   | 2.09 | % |
| Time deposits                                   |       | 211,397                                                     |       | 3,401 |   | 2.15 | % | 217,679 |   | 4,802 |   | 2.95 | % |
| Total interest-bearing deposits                 |       | 439,178                                                     |       | 4,719 |   | 1.44 | % | 394,874 |   | 6,357 |   | 2.15 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings                           |       | 14,474                                                      |       | 197 |   | 1.82 | % | 31,491 |   | 318 |   | 1.39 | % |
| Long-term borrowings, FHLB                      |       | 85,826                                                      |       | 2,733 |   | 4.20 | % | 86,778 |   | 2,781 |   | 4.23 | % |
| Total borrowings                                |       | 100,300                                                     |       | 2,930 |   | 3.86 | % | 118,269 |   | 3,099 |   | 3.47 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities              |       | 539,478                                                     |       | 7,649 |   | 1.89 | % | 513,143 |   | 9,456 |   | 2.46 | % |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                 |       | 81,833                                                      |       |   |   |   |   | 73,469 |   |   |   |   |   |
| Other liabilities                               |       | 8,243                                                       |       |   |   |   |   | 10,018 |   |   |   |   |   |
| Shareholders’ equity                       |       | 70,747                                                      |       |   |   |   |   | 61,416 |   |   |   |   |   |
|                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity |       | $                                                           | 700,301    |   |   |   |   |   | $ | 658,046 |   |   |   |   |   |
| Interest rate spread                            |       |                                                        |       |   |   | 4.22 | % |   |   |   |   | 4.02 | % |
| Net interest income/margin                      |       |                                                        |       | $ | 21,911 |   | 4.54 | % |   |   | $ | 19,796 |   | 4.39 | % |

 

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Thefollowing table presents the adjustment to convert net interest income to netinterest income on a fully taxable equivalent basis for the three and ninemonths ended September 30, 2010****and 2009.

 
| ** **                                     | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                     | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| **(In Thousands)**                        | ** ** | **2010**                                           | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                           |       |                                               |       |                                              |       |   |   |   |   |
| Total interest income                          |       | $                                                  | 9,182      |                                              | $          | 9,113 |   | $ | 27,295 |   | $ | 27,043 |   |
| Total interest expense                         |       | 2,424                                              |       | 3,168                                             |       | 7,649 |   | 9,456 |   |
|                                           |       |                                               |       |                                              |       |   |   |   |   |
| Net interest income                            |       | 6,758                                              |       | 5,945                                             |       | 19,646 |   | 17,587 |   |
| Tax equivalent adjustment                      |       | 757                                                |       | 740                                               |       | 2,265 |   | 2,209 |   |
|                                           |       |                                               |       |                                              |       |   |   |   |   |
| Net interest income (fully taxable equivalent) |       | $                                                  | 7,515      |                                              | $          | 6,685 |   | $ | 21,911 |   | $ | 19,796 |   |

 

Thefollowing table sets forth the respective impact that both volume and ratechanges have had on net interest income on a fully taxable equivalent basis forthe three and nine month periods ended September 30, 2010 and 2009:

 
| ** **                         | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **2010 vs 2009**                               | ** ** | **2010 vs 2009**                              | ** ** |
| ** **                         | ** ** | **Increase (Decrease)**                             | ** ** | **Increase (Decrease)**                            | ** ** |
| ** **                         | ** ** | **Due to**                                          | ** ** | **Due to**                                         | ** ** |
| **(In Thousands)**            | ** ** | **Volume**                                               | ** ** | **Rate**                                                | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
| Interest income:                   |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Loans, tax-exempt                  |       | $                                                        | 23         |                                                    | $          | 7 |   | $ | 30 |   | $ | 76 |   | $ | 21 |   | $ | 97 |   |
| Loans                              |       | 1,000                                                    |       | (1,043                                                  | )          | (43 | ) | 917 |   | (844 | ) | 73 |   |
| Taxable investment securities      |       | 532                                                      |       | (454                                                    | )          | 78 |   | 221 |   | (156 | ) | 65 |   |
| Tax-exempt investment securities   |       | 385                                                      |       | (365                                                    | )          | 20 |   | 277 |   | (208 | ) | 69 |   |
| Interest bearing deposits          |       | 1                                                        |       | —                                                  |       | 1 |   | 4 |   | — |   | 4 |   |
| Total interest-earning assets      |       | 1,941                                                    |       | (1,855                                                  | )          | 86 |   | 1,495 |   | (1,187 | ) | 308 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest expense:                  |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Savings deposits                   |       | 36                                                       |       | (75                                                     | )          | (39 | ) | 14 |   | (114 | ) | (100 | ) |
| Super Now deposits                 |       | 66                                                       |       | (98                                                     | )          | (32 | ) | 47 |   | (138 | ) | (91 | ) |
| Money market deposits              |       | 593                                                      |       | (639                                                    | )          | (46 | ) | 454 |   | (500 | ) | (46 | ) |
| Time deposits                      |       | (120                                                     | )          | (453                                                    | )          | (573 | ) | (134 | ) | (1,267 | ) | (1,401 | ) |
| Short-term borrowings              |       | 24                                                       |       | (29                                                     | )          | (5 | ) | (148 | ) | 27 |   | (121 | ) |
| Long-term borrowings, FHLB         |       | (30                                                      | )          | (19                                                     | )          | (49 | ) | (29 | ) | (19 | ) | (48 | ) |
| Total interest-bearing liabilities |       | 569                                                      |       | (1,313                                                  | )          | (744 | ) | 204 |   | (2,011 | ) | (1,807 | ) |
| Change in net interest income      |       | $                                                        | 1,372      |                                                    | $          | (542 | ) | $ | 830 |   | $ | 1,291 |   | $ | 824 |   | $ | 2,115 |   |

 

**Provision for Loan Losses**

 

Theprovision for loan losses is based upon management’s quarterly review of theloan portfolio.  The purpose of thereview is to assess loan quality, identify impaired loans, analyzedelinquencies, ascertain loan growth, evaluate potential charge-offs andrecoveries, and assess general economic conditions in the markets served.  An external independent loan review is also 

 

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performedannually for the Bank.  Managementremains committed to an aggressive program of problem loan identification andresolution.

 

Theallowance for loan losses is determined by applying loss factors to outstandingloans by type, excluding loans for which a specific allowance has beendetermined.  Loss factors are based onmanagement’s consideration of the nature of the portfolio segments, changes inmix and volume of the loan portfolio, and historical loan loss experience.  In addition, management considers industrystandards and trends with respect to non-performing loans and its knowledge andexperience with specific lending segments.

 

Althoughmanagement believes it uses the best information available to make suchdeterminations and that the allowance for loan losses is adequate at September 30,2010, future adjustments could be necessary if circumstances or economicconditions differ substantially from the assumptions used in making the initialdeterminations.  A downturn in the localeconomy, increased unemployment, and delays in receiving financial informationfrom borrowers could result in increased levels of nonperforming assets,charge-offs, loan loss provisions, and reductions in income.  Additionally, as an integral part of theexamination process, bank regulatory agencies periodically review the Bank’sloan loss allowance.  The bankingagencies could require the recognition of additions to the loan loss allowancebased on their judgment of information available to them at the time of theirexamination.

 

Whiledetermining the appropriate allowance level, management has attributed theallowance for loan losses to various portfolio segments; however, the allowanceis available for the entire portfolio as needed.

 

Theallowance for loan losses increased from $4,657,000 at December 31, 2009to $5,479,000 at September 30, 2010. At September 30, 2010 and December 31, 2009, the allowance forloan losses to total loans was 1.33% and 1.15%, respectively.

 

Theprovision for loan losses totaled $700,000 and $1,400,000 for the three andnine months ended September 30, 2010, compared to $270,000 and $582,000for the same periods in 2009.  The amountof the increase in the provision was the result of several factors, includingbut not limited to, an increase in gross loans of $12,048,000 since September 30,2009, a ratio of annualized net charge-offs to average loans of 0.19% for thenine months ended September 30, 2010, a ratio of nonperforming loans tototal loans of 1.68% at September 30, 2010, and a ratio of the allowancefor loan losses to nonperforming loans of 79.20% at September 30,2010.  Nonperforming loans increased to$6,918,000 at September 30, 2010****from$4,456,000 at December 31, 2009 due to an increase in commercial loandelinquencies.  Internal loan review andanalysis and the continued uncertainty surrounding the economy, coupled withthe ratios noted previously, dictated an increase in the provision for loanlosses.  The increase did not equate tothe change in charge-offs and nonperforming loans due to the economic situationand the collateral status of the nonperforming loans and overall loan portfolioin general, which limits the loan specific allocation of the allowance for loanlosses.

 

Followingis a table showing the changes in the allowance for loan losses for the ninemonths ended September 30, 2010****and 2009:

 

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| ** **                                                                                            | ** ** | **For the Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(In Thousands)**                                                                               | ** ** | **September 30, 2010**                  | ** ** | **September 30, 2009** | ** ** |
| Balance at beginning of period                                                                        |       | $                                                 | 4,657      |   | $ | 4,356 |   |
| Charge-offs:                                                                                          |       |                                              |       |   |   |
| Real estate                                                                                           |       | 321                                               |       | 272 |   |
| Commercial and industrial                                                                             |       | 261                                               |       | 129 |   |
| Installment loans to individuals                                                                      |       | 107                                               |       | 142 |   |
| Total charge-offs                                                                                     |       | 689                                               |       | 543 |   |
|                                                                                                  |       |                                              |       |   |   |
| Recoveries:                                                                                           |       |                                              |       |   |   |
| Real estate                                                                                           |       | 20                                                |       | 11 |   |
| Commercial and industrial                                                                             |       | 16                                                |       | 2 |   |
| Installment loans to individuals                                                                      |       | 75                                                |       | 70 |   |
| Total recoveries                                                                                      |       | 111                                               |       | 83 |   |
| Net charge-offs                                                                                       |       | 578                                               |       | 460 |   |
| Additions charged to operations                                                                       |       | 1,400                                             |       | 582 |   |
| Balance at end of period                                                                              |       | $                                                 | 5,479      |   | $ | 4,478 |   |
| Ratio of net annualized charge-offs during the  period to average loans outstanding during the period |       | 0.19                                              | %          | 0.16 | % |

 

Following is a table showing the changes in totalnonperforming loans as of: 

 
| ** **              | ** ** | **Total Nonperforming Loans** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | ** **                              | ** ** | **90 Days** | ** ** | ** ** | ** ** |
| **(In Thousands)** | ** ** | **Nonaccrual**                          | ** ** | **Past Due** | ** ** | **Total** | ** ** |
| September 30, 2010 |       | $                                       | 5,601      |   | $ | 1,317 |   | $ | 6,918 |   |
| June 30, 2010      |       | 6,299                                   |       | 347 |   | 6,646 |   |
| March 31, 2010     |       | 3,703                                   |       | 160 |   | 3,863 |   |
| December 31, 2009  |       | 1,891                                   |       | 2,565 |   | 4,456 |   |
| September 30, 2009 |       | 1,448                                   |       | 4,396 |   | 5,844 |   |
|                         |            |                                         |            |  |  |  |  |  |  |  |

 

Loansnot included above which are troubled debt restructurings, totaled $934,000,$426,000, and $353,000 at September 30, 2010, December 31, 2009, and September 30,2009, respectively.

 

**Non-interestIncome**

 

Totalnon-interest income for the three months ended September 30, 2010****compared to the same period in 2009 increased $489,000 to$1,870,000 due to a $616,000 decrease in net securities losses to a gain of$109,000.  Excluding net securities gainsand losses, non-interest income for the third quarter of 2010 would havedecreased $127,000 compared to the 2009 period. The decrease is primarily the result of a reduced level of gain on saleof loans related to a slowdown in the real estate market coupled with federaltax incentives offered to homebuyers that were in place during the first halfof 2010 that are believed to have pulled loan generations into the first halfof 2010.   Other income increased asdebit and credit card related income continues to become more prominent

 

Insurancecommissions for the three months ended September 30, 2010 decreased due tocontinued soft market and shift in product mix. Management of The M Group continues to 

 

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pursuenew and build upon current relationships. The sales call program continues to expand to other financialinstitutions, which results in additional revenue for The M Group if anadditional sales outlet is added. However, the addition of a sales outlet for The M Group can take up to ayear or more to be completed.

 

Totalnon-interest income for the nine months ended September 30, 2010 comparedto the same period in 2009 increased $5,361,000.  Excluding net securities gains, non-interestincome would have increased $237,000 compared to the 2009 period.   Gain on sale of loans was positivelyimpacted by the federal tax incentives being offered to home buyers.  The incentives increased volume during thefirst six months of 2010; however, the volume has slowed during the thirdquarter.  Insurance commissions and otherincome have been impacted for the nine months as noted in the three monthdiscussion.

 

Non-interestincome composition for the three and nine months ended September 30, 2010****and 2009 was as follows:

 
| ** **                     | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|
| ** **                     | ** ** | **September 30, 2010**                   | ** ** | **September 30, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**        | ** ** | **Amount**                                         | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposit service charges        |       | $                                                  | 562        |   | 30.1 | % | $ | 553 |   | 40.0 | % | $ | 9 |   | 1.6 | % |
| Securities gains (losses), net |       | 109                                                |       | 5.8 |   | (507 | ) | (36.7 | ) | 616 |   | 121.5 |   |
| Bank owned life insurance      |       | 143                                                |       | 7.6 |   | 144 |   | 10.4 |   | (1 | ) | (0.7 | ) |
| Gain on sale of loans          |       | 202                                                |       | 10.8 |   | 305 |   | 22.1 |   | (103 | ) | (33.8 | ) |
| Insurance commissions          |       | 230                                                |       | 12.3 |   | 287 |   | 20.8 |   | (57 | ) | (19.9 | ) |
| Other                          |       | 624                                                |       | 33.4 |   | 599 |   | 43.4 |   | 25 |   | 4.2 |   |
| Total non-interest income      |       | $                                                  | 1,870      |   | 100.0 | % | $ | 1,381 |   | 100.0 | % | $ | 489 |   | 35.4 | % |

 
| ** **                     | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **September 30, 2010**                  | ** ** | **September 30, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**        | ** ** | **Amount**                                        | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Deposit service charges        |       | $                                                 | 1,609      |   | 28.9 | % | $ | 1,619 |   | 760.1 | % | $ | (10 | ) | (0.6 | )% |
| Securities gains (losses), net |       | 162                                               |       | 2.9 |   | (4,962 | ) | (2,329.5 | ) | 5,124 |   | 103.3 |   |
| Bank owned life insurance      |       | 442                                               |       | 7.9 |   | 418 |   | 196.2 |   | 24 |   | 5.7 |   |
| Gain on sale of loans          |       | 714                                               |       | 12.8 |   | 526 |   | 246.9 |   | 188 |   | 35.7 |   |
| Insurance commissions          |       | 767                                               |       | 13.8 |   | 988 |   | 463.8 |   | (221 | ) | (22.4 | ) |
| Other                          |       | 1,880                                             |       | 33.7 |   | 1,624 |   | 762.5 |   | 256 |   | 15.8 |   |
| Total non-interest income      |       | $                                                 | 5,574      |   | 100.0 | % | $ | 213 |   | 100.0 | % | $ | 5,361 |   | 2,516.9 | % |

 

**Non-interestExpense**

 

Totalnon-interest expense decreased $393,000 for the three months ended September 30,2010****compared to the same period of2009.  The decrease in salaries andemployee benefits was attributable primarily to a reduction in expenseassociated with the defined benefit pension plan as the plans investmentportfolio performance has increased.   Other expenses decreased due to various items ranging from advertisingto telephone as contracts were renewed at lower levels due to increased vendorcompetition.

 

Totalnon-interest expense increased $53,000 for the nine months ended September 30,2010 compared to the same period of 2009. The increase in non-interest expense for the nine month 

 

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periodis primarily the result of increased retirement benefit accruals andamortization related to a low income elderly housing limited partnership thatbegan during the three months ended September 30, 2010.  Other expenses decreased due to the sameitems noted in the three month discussion.

 

Non-interestexpense composition for the nine months ended September 30, 2010****and 2009 was as follows:

 
| ** **                                         | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                         | ** ** | **September 30, 2010**                   | ** ** | **September 30, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**                            | ** ** | **Amount**                                         | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Salaries and employee benefits                     |       | $                                                  | 2,427      |   | 51.6 | % | $ | 2,588 |   | 50.8 | % | $ | (161 | ) | (6.2 | )% |
| Occupancy, net                                     |       | 303                                                |       | 6.4 |   | 299 |   | 5.9 |   | 4 |   | 1.3 |   |
| Furniture and equipment                            |       | 296                                                |       | 6.3 |   | 293 |   | 5.7 |   | 3 |   | 1.0 |   |
| Pennsylvania shares tax                            |       | 170                                                |       | 3.6 |   | 171 |   | 3.4 |   | (1 | ) | (0.6 | ) |
| Amortization of investment in limited partnerships |       | 200                                                |       | 4.3 |   | 142 |   | 2.8 |   | 58 |   | 40.9 |   |
| Other                                              |       | 1,308                                              |       | 27.8 |   | 1,604 |   | 31.4 |   | (296 | ) | (18.5 | ) |
| Total non-interest expense                         |       | $                                                  | 4,704      |   | 100.0 | % | $ | 5,097 |   | 100.0 | % | $ | (393 | ) | (7.7 | )% |

 
| ** **                                         | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                         | ** ** | **September 30, 2010**                  | ** ** | **September 30, 2009** | ** ** | **Change** | ** ** |
| **(In Thousands)**                            | ** ** | **Amount**                                        | ** ** | **% Total** | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Salaries and employee benefits                     |       | $                                                 | 7,779      |   | 53.0 | % | $ | 7,665 |   | 52.4 | % | $ | 114 |   | 1.5 | % |
| Occupancy, net                                     |       | 947                                               |       | 6.4 |   | 956 |   | 6.5 |   | (9 | ) | (0.9 | ) |
| Furniture and equipment                            |       | 922                                               |       | 6.3 |   | 906 |   | 6.2 |   | 16 |   | 1.8 |   |
| Pennsylvania shares tax                            |       | 508                                               |       | 3.5 |   | 514 |   | 3.5 |   | (6 | ) | (1.2 | ) |
| Amortization of investment in limited partnerships |       | 483                                               |       | 3.3 |   | 425 |   | 2.9 |   | 58 |   | 13.6 |   |
| Other                                              |       | 4,041                                             |       | 27.5 |   | 4,161 |   | 28.5 |   | (120 | ) | (2.9 | ) |
| Total non-interest expense                         |       | $                                                 | 14,680     |   | 100.0 | % | $ | 14,627 |   | 100.0 | % | $ | 53 |   | 0.4 | % |

 

**Provisionfor Income Taxes**

 

Incometaxes increased $339,000 and $2,074,000 for the three and nine months ended September 30,2010****compared to the same period of2009.  The primary cause of the changesin tax expense is the impact of net securities losses in the three and ninemonth periods of 2009 compared to net securities gains for the same periods of2010.  Excluding the impact of the netsecurities gains and losses, the effective tax rate for the three and ninemonths ended September 30, 2010 was 10.88% and 11.33% compared to 8.48%and 9.07% for the same period of 2009. The Company currently is in a deferred tax asset position due to the lowincome housing tax credits earned both currently and previously.  Management has reviewed the deferred taxasset and has determined that the asset will be utilized within the appropriatecarry forward period and therefore does not require a valuation allowance.

 

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**ASSET/LIABILITY MANAGEMENT**

 

**Cash and Cash Equivalents**

 

Cashand cash equivalents increased $9,269,000 from $13,788,000 at December 31,2009 to $23,057,000 at September 30, 2010****primarilyas a result of the following activities during the nine months ended September 30,2010:

 

**Loans Held for Sale**

 

Activityregarding loans held for sale resulted in loan originations exceeding saleproceeds, less $714,000 in realized gains, by $1,297,000 for the nine monthsended September 30, 2010.

 

**Loans**

 

Grossloans increased $7,344,000 since December 31, 2009 due primarily to anincrease of non-real estate and commercial real estate loans, which waspartially offset by a decrease in residential and installment loans.

 

The allocation of the loan portfolio, by category,as of September 30, 2010 and December 31,2009 is presented below:

 
| ** **                             | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** | **Change** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------|------------|
| **(In Thousands)**                | ** ** | **Amount**                       | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Commercial, financial and agricultural |       | $                                | 51,544     |                            | 12.5       | %          | $          | 46,647 |   | 11.5 | % | $ | 4,897 |   | 10.5 | % |
| Real estate mortgage:                  |       |                             |       |                            |       |       |       |   |   |   |   |   |   |
| Residential                            |       | 173,648                          |       | 42.0                            |       | 174,346    |       | 43.1 |   | (698 | ) | (0.4 | ) |
| Commercial                             |       | 155,948                          |       | 37.8                            |       | 152,209    |       | 37.5 |   | 3,739 |   | 2.5 |   |
| Construction                           |       | 22,898                           |       | 5.5                             |       | 21,795     |       | 5.4 |   | 1,103 |   | 5.1 |   |
| Installment loans to individuals       |       | 9,854                            |       | 2.4                             |       | 11,549     |       | 2.8 |   | (1,695 | ) | (14.7 | ) |
| Less: Net deferred loan fees           |       | 1,019                            |       | (0.2                            | )          | 1,017      |       | (0.3 | ) | 2 |   | 0.2 |   |
| Gross loans                            |       | $                                | 412,873    |                            | 100.0      | %          | $          | 405,529 |   | 100.0 | % | $ | 7,344 |   | 1.8 | % |

 

**Investments**

 

Thefair value of the investment securities portfolio at September 30, 2010has increased $23,265,000 since December 31, 2009.  The change is primarily due to purchases ofstate and political securities and short-term corporate securities coupled withthe level of net unrealized gains/losses increasing $8,524,000 to a gain of$3,118,000 for the entire portfolio.  Theunrealized losses within the debt securities portfolio are the result of marketactivity, not credit issues/ratings, as approximately 94% of the debtsecurities portfolio is currently rated A or higher by either S&P or Moody’s.

 

TheCompany considers various factors, which include examples from applicableaccounting guidance, when analyzing the available for sale portfolio forpossible other than temporary impairment. The Company primarily considers the following factors in its analysis:length of time and severity of the market value being less than carrying value,reduction of dividend paid (equities), continued payment of dividend/interest,credit rating, and financial condition of an issuer, intent and ability to holduntil anticipated recovery (which may be maturity), and general outlook for theeconomy, specific industry, and entity in question.

 

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Thebond portion of the portfolio review is conducted with emphases on severalfactors.  Continued payment of principaland interest is given primary importance with credit rating and financialcondition of the issuer following as the next most important.  Credit ratings were reviewed with the ratingsof the bonds being satisfactory.  Thosethat were not currently rated were discussed with a third party and/orunderwent an internal financial review. The Company also monitors whether each of the investments incurred adecline in market value from carrying value of at least 20% for twelveconsecutive months or a similar decline of at least 50% for three consecutivemonths.  Each bond is reviewed todetermine whether it is a general obligation bond, which is backed by thecredit and taxing power of the issuing jurisdiction, or revenue bond, which is onlypayable from specified revenues.  Basedon the review undertaken by the Company, theCompany determined that the decline in value of the various bond holdings weredeemed to be temporary and were the result of the general market downturns andinterest rate/yield curve changes, not credit issues.  The fact that almost all of such bonds aregeneral obligation bonds further solidified the Company’s determination thatthe decline in the value of these bond holdings is temporary.

 

Thefair value of the equity portfolio continues to fluctuate as the economicturbulence continues to impact financial sector stock pricing.  The equity market improvement over the firstnine months of 2010 has led to an increase in net unrealized gains of $176,000to $1,003,000 at September 30, 2010. In addition, the amortized cost of the equity securities portfolio hasincreased $1,421,000 as the Company has begun to build the portfolio balance,while continuing to diversify geographic risk.

 

Theequity portion of the portfolio, which is invested entirely in financial institutions,is reviewed for possible other than temporary impairment in a similar manner tothe bond portfolio with greater emphasis placed on the length of time themarket value has been less than the carrying value and financial sectoroutlook.  The Company also reviewsdividend payment activities and, in the case of financial institutions, whetheror not such issuer was participating in the TARP Capital Purchase Program.  The starting point for the equity analysis isthe length and severity of a market price decline.  The Company monitors two primary measures:20% decline for twelve consecutive months and 50% decline for three consecutivemonths in market value from carrying value.

 

Thedistribution of credit ratings by amortized cost and fair values for the debtsecurity portfolio at September 30, 2010****follows:

 
| ** **                                  | ** ** | **A- to AAA** | ** ** | **B- to BBB+** | ** ** | **C to CCC+** | ** ** | **Not Rated** | ** ** | **Total**     | ** ** |
|---------------------------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|--------------------|------------|---------------|------------|
| ** **                                  | ** ** | **Amortized**           | ** ** | **Fair**                 | ** ** | **Amortized**           | ** ** | **Fair**           | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| **(In Thousands)**                     | ** ** | **Cost**                | ** ** | **Value**                | ** ** | **Cost**                | ** ** | **Value**          | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| **Available for sale (AFS)** |       |                    |       |                     |       |                    |       |               |       |          |       |   |   |   |   |   |   |   |   |   |   |
| U.S.  Government and agency securities      |       | $                       | 27,494     |                     | $          | 29,378                  |       | $                  | —     |          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 27,494 |   | $ | 29,378 |   |
| State  and political securities             |       | 157,815                 |       | 157,948                  |       | 5,850                   |       | 5,475              |       | —        |       | — |   | 6,235 |   | 6,065 |   | 169,900 |   | 169,488 |   |
| Other  debt securities                      |       | 18,253                  |       | 18,884                   |       | 800                     |       | 812                |       | —        |       | — |   | 121 |   | 120 |   | 19,174 |   | 19,816 |   |
| Total  debt securities AFS                  |       | $                       | 203,562    |                     | $          | 206,210                 |       | $                  | 6,650      |          | $          | 6,287 |   | $ | — |   | $ | — |   | $ | 6,356 |   | $ | 6,185 |   | $ | 216,568 |   | $ | 218,682 |   |
|                                        |       |                    |       |                     |       |                    |       |               |       |          |       |   |   |   |   |   |   |   |   |   |   |
| Held  to maturity (HTM)                     |       |                    |       |                     |       |                    |       |               |       |          |       |   |   |   |   |   |   |   |   |   |   |
| U.S.  Government and agency securities      |       | $                       | 5          |                     | $          | 5                       |       | $                  | —     |          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 5 |   | $ | 5 |   |
| Other  debt securities                      |       | 77                      |       | 78                       |       | —                  |       | —             |       | —        |       | — |   | — |   | — |   | 77 |   | 78 |   |
| Total  debt securities HTM                  |       | $                       | 82         |                     | $          | 83                      |       | $                  | —     |          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 82 |   | $ | 83 |   |

 

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**Financing Activities**

 

**Deposits**

 

Totaldeposits increased 7.4% or $36,883,000 from December 31, 2009 to September 30,2010.  The growth was led by asubstantial increase in money market deposits of 40.9% from December 31,2009 to September 30, 2010.  Theincrease in core deposits (deposits less time deposits) has providedrelationship driven funding for the loan and investment portfolios, while alsoreducing the utilization of FHLB borrowings. The increase in deposits is the result of a deposit gathering programcoupled with customers returning to their hometown bank in the wake of theeconomic turbulence.  Electronic deliverychannels, such as remote deposit capture and mobile banking, are beingemphasized as efforts to capitalize on the economic development being providedby the Marcellus Shale natural gas exploration.

 

Depositbalances and their changes for the periods being discussed follow:

 
| ** **              | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** | **Change** | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------|------------|
| **(In Thousands)** | ** ** | **Amount**                       | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Demand deposits         |       | $                                | 92,128     |                            | 17.3       | %          | $          | 79,899 |   | 16.1 | % | $ | 12,229 |   | 15.3 | % |
| NOW accounts            |       | 66,957                           |       | 12.5                            |       | 64,361     |       | 12.9 |   | 2,596 |   | 4.0 |   |
| Money market deposits   |       | 105,147                          |       | 19.7                            |       | 74,634     |       | 15.0 |   | 30,513 |   | 40.9 |   |
| Savings deposits        |       | 66,763                           |       | 12.5                            |       | 60,827     |       | 12.2 |   | 5,936 |   | 9.8 |   |
| Time deposits           |       | 203,175                          |       | 38.0                            |       | 217,566    |       | 43.8 |   | (14,391 | ) | (6.6 | ) |
| Total deposits          |       | $                                | 534,170    |                            | 100.0      | %          | $          | 497,287 |   | 100.0 | % | $ | 36,883 |   | 7.4 | % |

 

**Borrowed Funds**

 

Totalborrowed funds decreased 8.3% or $8,725,000 to $96,407,000 at September 30,2010****compared to $105,132,000 at December 31,2009.  The decrease in borrowed funds isprimarily the result of growth in deposits as part of the previously discusseddeposit gathering campaigns that were utilized to provide loan portfoliofunding and to reduce the level of total borrowings.  FHLB repurchase agreements were utilized astheir structure allowed for a reduction in interest expense, while providingthe ability to reduce the borrowings at our discretion as deposit levelsincreased.

 
| ** **                                    | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------|------------|
| **(In Thousands)**                       | ** ** | **Amount**                       | ** ** | **% Total**                | ** ** | **Amount** | ** ** | **% Total** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Short-term borrowings:                        |       |                             |       |                            |       |       |       |   |   |   |   |   |   |
| FHLB repurchase agreements                    |       | $                                | —     |                            | —     | %          | $          | 5,155 |   | 4.9 | % | $ | (5,155 | ) | (100.0 | )% |
| Securities sold under agreement to repurchase |       | 14,629                           |       | 15.2                            |       | 13,199     |       | 12.6 |   | 1,430 |   | 10.8 |   |
| Total short-term borrowings                   |       | 14,629                           |       | 15.2                            |       | 18,354     |       | 17.5 |   | (3,725 | ) | (20.3 | ) |
|                                          |       |                             |       |                            |       |       |       |   |   |   |   |   |   |
| Long-term borrowings, FHLB                    |       | 81,778                           |       | 84.8                            |       | 86,778     |       | 82.5 |   | (5,000 | ) | (5.8 | ) |
| Total borrowed funds                          |       | $                                | 96,407     |                            | 100.0      | %          | $          | 105,132 |   | 100.0 | % | $ | (8,725 | ) | (8.3 | )% |

 

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**Capital**

 

Theadequacy of the Company’s capital is reviewed on an ongoing basis withreference to the size, composition, and quality of the Company’s resources andregulatory guidelines.  Management seeksto maintain a level of capital sufficient to support existing assets andanticipated asset growth, maintain favorable access to capital markets, andpreserve high quality credit ratings.

 

Bankholding companies are required to comply with the Federal Reserve Board’srisk-based capital guidelines.  Therisk-based capital rules are designed to make regulatory capitalrequirements more sensitive to differences in risk profiles among banks andbank holding companies and to minimize disincentives for holding liquidassets.  Specifically, each is requiredto maintain certain minimum dollar amounts and ratios of total risk-based, tierI risk-based, and tier I leverage capital. In addition to the capitalrequirements, the Federal Deposit Insurance Corporation Improvements Act(FDICIA) established five capital categories ranging from “well capitalized” to“critically undercapitalized.” To be classified as “well capitalized”, totalrisk-based, tier I risked-based, and tier I leverage capital ratios must be atleast 10%, 6%, and 5%, respectively.

 

Capital ratios as of September 30,2010 and December 31, 2009 were as follows: 

 
| ** **                                    | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **(In Thousands)**                       | ** ** | **Amount**                       | ** ** | **Ratio**                       | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **Total Capital (to Risk-weighted  Assets)**  |       |                             |       |                            |       |   |   |   |   |
| Actual                                        |       | $                                |       | 70,973                          |       | 15.5 | % | $ |   | 67,738 |   | 15.4 | % |
| For Capital Adequacy Purposes                 |       | 36,637                           |       | 8.0                             |       | 35,094 |   | 8.0 |   |
| To Be Well Capitalized                        |       | 45,796                           |       | 10.0                            |       | 43,867 |   | 10.0 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| **Tier I Capital (to Risk-weighted  Assets)** |       |                             |       |                            |       |   |   |   |   |
| Actual                                        |       | $                                |       | 65,043                          |       | 14.2 | % | $ |   | 62,709 |   | 14.3 | % |
| For Capital Adequacy Purposes                 |       | 18,318                           |       | 4.0                             |       | 17,547 |   | 4.0 |   |
| To Be Well Capitalized                        |       | 27,478                           |       | 6.0                             |       | 26,320 |   | 6.0 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| **Tier I Capital (to Average  Assets)**       |       |                             |       |                            |       |   |   |   |   |
| Actual                                        |       | $                                |       | 65,043                          |       | 9.3 | % | $ |   | 62,709 |   | 9.3 | % |
| For Capital Adequacy Purposes                 |       | 27,986                           |       | 4.0                             |       | 26,914 |   | 4.0 |   |
| To Be Well Capitalized                        |       | 34,983                           |       | 5.0                             |       | 33,642 |   | 5.0 |   |

 

**Liquidity; Interest Rate Sensitivity and Market Risk**

 

Theasset/liability committee addresses the liquidity needs of the Company toensure that sufficient funds are available to meet credit demands and depositwithdrawals as well as to the 

 

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placementof available funds in the investment portfolio. In assessing liquidity requirements, equal consideration is given to thecurrent position as well as the future outlook.

 

Thefollowing liquidity measures are monitored for compliance and were within thelimits cited at September 30, 2010:

 

1.  Net Loans to Total Assets, 85% maximum

2.  Net Loans to Total Deposits, 100% maximum

3.  Cumulative 90 day Maturity GAP %, +/- 20%maximum

4.  Cumulative 1 Year Maturity GAP %, +/- 25%maximum

 

Fundamentalobjectives of the Company’s asset/liability management process are to maintainadequate liquidity while minimizing interest rate risk.  The maintenance of adequate liquidityprovides the Company with the ability to meet its financial obligations todepositors, loan customers, and shareholders. Additionally, it provides funds for normal operating expenditures andbusiness opportunities as they arise. The objective of interest rate sensitivity management is to increase netinterest income by managing interest sensitive assets and liabilities in such away that they can be repriced in response to changes in market interest rates.

 

TheBank, like other financial institutions, must have sufficient funds availableto meet its liquidity needs for deposit withdrawals, loan commitments andoriginations, and expenses.  In order tocontrol cash flow, the Bank estimates future cash flows from deposits, loanpayments, and investment security payments. The primary sources of funds are deposits, principal and interestpayments on loans and investment securities, FHLB borrowings, and brokereddeposits.  Management believes the Bankhas adequate resources to meet its normal funding requirements.

 

Managementmonitors the Company’s liquidity on both a long and short-term basis, therebyproviding management necessary information to react to current balance sheettrends.  Cash flow needs are assessed andsources of funds are determined.  Fundingstrategies consider both customer needs and economical cost.  Both short and long-term funding needs areaddressed by maturities and sales of available for sale investment securities,loan repayments and maturities, and liquidating money market investments suchas federal funds sold.  The use of theseresources, in conjunction with access to credit provides core funding tosatisfy depositor, borrower, and creditor needs.

 

Managementmonitors and determines the desirable level of liquidity.  Consideration is given to loan demand,investment opportunities, deposit pricing and growth potential, as well as thecurrent cost of borrowing funds.  TheCompany has a current borrowing capacity at the FHLB of $217,313,000.  In addition to this credit arrangement, theCompany has additional lines of credit with correspondent banks of $13,593,000.Management believes it has sufficient liquidity to satisfy estimated short-termand long-term funding needs.  FHLBborrowings totaled $81,778,000 as of September 30, 2010.

 

Interestrate sensitivity, which is closely related to liquidity management, is afunction of the repricing characteristics of the Company’s portfolio of assetsand liabilities.  Asset/liabilitymanagement strives to match maturities and rates between loan and investmentsecurity assets 

 

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withthe deposit liabilities and borrowings that fund them.  Successful asset/liability management resultsin a balance sheet structure which can cope effectively with market ratefluctuations. The matching process is affected by segmenting both assets andliabilities into future time periods (usually 12 months, or less) based uponwhen repricing can be effected. Repriceable assets are subtracted from repriceable liabilities, for aspecific time period to determine the “gap”, or difference. Once known, the gapis managed based on predictions about future market interest rates.  Intentional mismatching, or gapping, canenhance net interest income if market rates move as predicted.  However, if market rates behave in a mannercontrary to predictions, net interest income will suffer.  Gaps, therefore, contain an element of riskand must be prudently managed.  Inaddition to gap management, the Company has an asset/liability managementpolicy which incorporates a market value at risk calculation which is used todetermine the effects of interest rate movements on shareholders’ equity and asimulation analysis to monitor the effects of interest rate changes on theCompany’s balance sheet.

 

TheCompany currently maintains a GAP position of being liability sensitive.  The Company has strategically taken thisposition as it has decreased the duration of the time deposit portfolio, whilecontinuing to maintain a primarily fixed rate earning asset portfolio with aduration greater than the liabilities utilized to fund earning assets.  Lengthening of the liability portfoliocoupled with the addition of limited short-term assets is beingundertaken.  These actions are expectedto reduce, but not eliminate, the liability sensitive structure of the balancesheet.

 

Amarket value at risk calculation is utilized to monitor the effects of interestrate changes on the Company’s balance sheet and more specifically shareholders’equity.  The Company does not manage thebalance sheet structure in order to maintain compliance with thiscalculation.  The calculation serves as aguideline with greater emphases placed on interest rate sensitivity.  Changes to calculation results from period toperiod are reviewed as changes in results could be a signal of futureevents.  As of the most recent analysis,the results of the market value at risk calculation were outside of establishedguidelines due to the strategic direction being taken.

 

**InterestRate Sensitivity**

 

Inthis analysis the Company examines the result of a 100 and 200 basis pointchange in market interest rates and the effect on net interest income. It isassumed that the change is instantaneous and that all rates move in a parallelmanner.  Assumptions are also madeconcerning prepayment speeds on mortgage loans and mortgage securities.

 

The following is a rateshock forecast for the twelve month period ended September 30, 2011assuming a static balance sheet as of September 30, 2010.

 
| ** **                 | ** ** | **Parallel Rate Shock in Basis Points** | ** ** |
|----------------------------|------------|------------------------------------------------------------------|------------|
| **(In Thousands)**    | ** ** | **-200**                                                         | ** ** | **-100** | ** ** | **Static** | ** ** | **+100** | ** ** | **+200** | ** ** |
| Net interest income        |       | $                                                                | 25,411     |   | $ | 26,315 |   | $ | 26,420 |   | $ | 25,948 |   | $ | 25,340 |   |
| Change from static         |       | (1,009                                                           | )          | (105 | ) | — |   | (472 | ) | (1,080 | ) |
| Percent change from static |       | -3.82                                                            | %          | -0.40 | % | — |   | -1.79 | % | -4.09 | % |
|                            |            |                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Themodel utilized to create the report presented above makes various estimates ateach level of interest rate change regarding cash flow from principal repaymenton loans and mortgage-backed securities and/or call activity on investmentsecurities.  Actual results could differsignificantly from these estimates which would result in significantdifferences in the calculated projected change. In addition, the limits stated above do not necessarily represent thelevel of change under which management would undertake specific measures torealign its portfolio in order to reduce the projected level of change.  Generally, management believes the Company iswell positioned to respond expeditiously when the market interest rate outlookchanges.

 

**Inflation**

 

Theasset and liability structure of a financial institution is primarily monetaryin nature.  Therefore, interest ratesrather than inflation have a more significant impact on the Company’sperformance.  Interest rates are notalways affected in the same direction or magnitude as prices of other goods andservices, but are reflective of fiscal policy initiatives or economic factorswhich are not measured by a price index.

 

**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

Marketrisk for the Company is comprised primarily of interest rate risk exposure andliquidity risk.  Interest rate risk andliquidity risk management is performed at the Bank level as well as the Companylevel.  The Company’s interest ratesensitivity is monitored by management through selected interest rate riskmeasures produced by an independent third party.  There have been no substantial changes in theCompany’s gap analyses or simulation analyses compared to the informationprovided in the Annual Report on Form 10-K for the period ended December 31,2009.  Additional information and detailsare provided in the “Liquidity and Interest Rate Sensitivity” section of “Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

Generally,management believes the Company is well positioned to respond in a timelymanner when the market interest rate outlook changes.

 

**Item 4.  Controls and Procedures**

 

Ananalysis was performed under the supervision and with the participation of theCompany’s management, including the Chief Executive Officer and the ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures. Based on that evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures were effective as of September 30,2010.  There were no changes in theCompany’s internal control over financial reporting that occurred during thequarter ended September 30, 2010, that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**Part II.  OTHER INFORMATION**

 

**Item 1.          Legal Proceedings**

 

None.

 

**Item 1A.  Risk Factors**

 

There are no materialchanges to the risk factors set forth in Part I, Item 1A, “RiskFactors,” of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2009.  Please refer tothat section for disclosures regarding the risks and uncertainties related tothe Company’s business.

 

**Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds**

 
| ** **                                             | ** ** | **Total**           | ** ** | **Average**         | ** ** | **Total Number of**           | ** ** | **Maximum Number (or**                    | ** ** |
|--------------------------------------------------------|------------|---------------------|------------|---------------------|------------|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **Number of**  | ** ** | **Price Paid** | ** ** | **Shares (or Units)**         | ** ** | **Approximate Dollar Value)**             | ** ** |
| ** **                                             | ** ** | **Shares (or** | ** ** | **per Share**  | ** ** | **Purchased as Part of** | ** ** | **of Shares (or Units) that**   | ** ** |
| ** **                                             | ** ** | **Units)**          | ** ** | **(or Units)** | ** ** | **Publicly Announced**             | ** ** | **May Yet Be Purchased**             | ** ** |
| **Period**                                             | ** ** | **Purchased**       | ** ** | **Purchased**       | ** ** | **Plans or Programs**         | ** ** | **Under the Plans or Programs** | ** ** |
|                                                   |       |                |       |                |       |                                    |       |                                                |       |
| Month #1 (July 1 - July 31, 2010)            |       | —              |       | —              |       | —                                  |       | 76,776                                              |       |
|                                                   |       |                |       |                |       |                                    |       |                                                |       |
| Month #2 (August 1 - August 31, 2010)        |       | —              |       | —              |       | —                                  |       | 76,776                                              |       |
|                                                   |       |                |       |                |       |                                    |       |                                                |       |
| Month #3 (September 1 - September 30,  2010) |       | —              |       | —              |       | —                                  |       | 76,776                                              |       |

 

OnApril 27, 2010, the Board of Directors extended the previously approvedauthorization to repurchase up to 197,000 shares, or approximately 5%, of theoutstanding shares of the Company for an additional year to April 30,2011.  To date, there have been 120,224shares repurchased under this plan.

 

**Item 3.          Defaults Upon Senior Securities**

 

None

 

**Item 4.          (Removed and Reserved)**

 

**Item 5.          Other Information**

 

None

 

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**Item 6.          Exhibits**

 
| (3)   (i)  |   | Articles  of Incorporation of the Registrant, as presently in effect (incorporated by  reference to Exhibit 3(i) of the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 2005). |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3)   (ii) |   | Bylaws  of the Registrant’s as presently in effect (incorporated by reference to  Exhibit 3(ii) of the Registrant’s Current Report on Form 8-K  filed June 17, 2005).                              |
| (31)  (i)       |   | Rule 13a-14(a)/Rule 15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                          |
| (31)  (ii)      |   | Rule 13a-14(a)/Rule 15d-14(a) Certification  of Chief Financial Officer.                                                                                                                                          |
| (32)  (i)       |   | Section 1350  Certification of Chief Executive Officer.                                                                                                                                                                     |
| (32)  (ii)      |   | Section 1350  Certification of Chief Financial Officer.                                                                                                                                                                     |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|   |                   | PENNS  WOODS BANCORP, INC.                                                                                    |
|--------|------------------------|--------------------------------------------------------------------------------------------------------------------|
|   |                   |                  (Registrant) |
|   |                   |                                                                                                               |
|   |                   |                                                                                                               |
| Date:  | November 9,  2010 | /s/  Richard A. Grafmyre                                                                                           |
|   |                   | Richard  A. Grafmyre, President and Chief Executive Officer                                                        |
|   |                   | (Principal  Executive Officer)                                                                                     |
|   |                   |                                                                                                               |
|   |                   |                                                                                                               |
| Date:  | November 9,  2010 | /s/  Brian L. Knepp                                                                                                |
|   |                   | Brian  L. Knepp, Chief Financial Officer                                                                           |
|   |                   | (Principal  Financial Officer and Principal Accounting                                                             |
|   |                   | Officer)                                                                                                           |

 

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**EXHIBIT INDEX**

 
| Exhibit 31(i)  | Rule 13a-14(a)/Rule 15d-14(a) Certification  of Chief Executive Officer |
|---------------------|----------------------------------------------------------------------------------------|
| Exhibit 31(ii) | Rule 13a-14(a)/Rule 15d-14(a) Certification  of Chief Financial Officer |
| Exhibit 32(i)  | Section 1350  Certification of Chief Executive Officer                            |
| Exhibit 32(ii) | Section 1350  Certification of Chief Financial Officer                            |

 

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